HOW TO PAY
FOB. THE
WAR
A RADICAL FLAN FOR THK
CHANCELLOR OF THE
EXCHEQUER
By
JOHN MAYNARD ICEYNES
MACMILLAN AND CO., LIMITED
ST. MARTIN’S STREET, LONDON
1940
Brethren, Friends, Countrymen and, FeUow Subjects,
What I intend now to say to you, is, next to your Duty
to God, and the Care of your Salvation, of the greatest
Concern to your selves, and your Children; your Bread and
Chathing, and every common Necessary of Life entirely
depend upon it. Therefore I do most earnestly exhort you
as Men, as Christians, as Parents, and as Lovers of your
Country, to read this Paper with the utmost Attention, or
get it read to you by others ; which that' you may do at the
less Expence, I have ordered the Printer to sell it at the
lowest Rate.
It is a great Pault among yon, that when a Person writes
with no other Intention than to do you good, you will not be
at the Pains to read his Advices : One Copy of tiiis Paper may
serve a Dozen of you, which will be less than a Farthing a-piece.
It is your Folly that you have no common or general Interest
in your View, not even the Wisest among you, neither do you
know or enquire, or care who are your Briends, or who are
your Enemies.
(From the Drapier’s First Letter — 1724)
FEINTED IN OBEAT BBITAIN
TREFAGE^
This is a discussion of how "best to reconcile the
demands of War and the claims of private con-
sumption.
In three articles published in The Times last
November I put forward a first draft of proposals
under the description of “Compulsory Savings”.
It was not to be expected that a new plan of
this character would be received with enthusiasm.
But it was not rejected either by experts or by
the public. No^rae has suggested anything better.
That public opinion was, as yet, not ready for
such ideas, was the usual criticism. And this was
obviously true. Nevertheless a time must come
when the necessities of a war economy are realised;
and there is much evidence for the belief that the
public are not so behind-hand.
Amongst the manifold comments provoked
there were some valuable suggestions. In the
revised draft here set forth in ampler detail I
have taken advantage of these. In the first
version I was mainly concerned with questions
of financial technique and did not secure the
full gain in social justice for which this technique
opened the way. In this revision, therefore, I
have endeavoured to snatch fi:om the exigency
of war positive social improvements. (The complete
scheme now proposed, including universal family
allowances in cash, the accumulation of working-
class wealth under working-class control, a cheap
ration of necessaries, and a capital levy (or tax)
after the war, embodies an advance towards
iii
iv PREFACE
economic equality greater than any which we
have made in recent timesj) There should be no
paradox in this. The sacrifices required by war
direct more urgent attention than before to
sparing them where they can be least afforded.
A plan like this cannot be fairly judged except
against an alternative. But so far we have had
no hint what alternative is in view. The Chan-
cellor of the Exchequer has recently explained
to the House of Commons that he is seeking to
prevent a rise of wages by subsi^sing the cost
of living. As an ingredient in a comprehensive
plan, this is a wise move; something of the kind
is recommended in what follows. a stop-gap
arrangement to gain time it is prudent. But
taken by itself it is the opposite of a solution.
In making money go further it aggravates the
problem of reaching equilibrium between the
spending power in people’s pockets and what can
be released for their consumption.
The Chancellor has expressed agreement with
this conclusion. I hope, therefore, that he will
look with sympathy on an attempt to work his
policy into a consistent whole. I have canvassed
these proposals in many quarters and comment has
reached me from aU shades of opinion. I confidently
believe that, put forward with authority, they
would not be unpopular. No one is expecting to
get off scot-free. The fault of my plan is that it
asks, not too much, but too little ; and it may look, a
year hence, too feeble a beginning for a heavy task.
Since one cannot rule out the possibility that
we shall drift or adopt half-measures, I will
PREFACE
V
venture on a prediction of the result of this. I
discuss below the mechanism of inflation; and
that, I suppose, is what most people are expecting
if we shirk. But except at a slow rate and as the
second stage of deterioration, this is not my
immediate expectation. There is a passage in the
“ Golden Bough” where the proneness of primitive
man to generalise on the basis of a very few
experiences is amusingly illustrated. Men like
dogs are only too easily “conditioned” and always
expect that, when the bell rings, they will have
the same experience as last time. But the psy-
chology which provoked previous price-inflations
is not present to-day. So far from there being
a natural tendency to raise prices in response to
an unsatisfied demand, manufacturers and re-
tailers are as reluctant to charge higher prices
except in response to an actual rise in cost as the
public are to pay them. They have no desire to
flout public opinion and what appears to be the
intention of the authorities. They are doubtful
how they stand under the Anti-Profiteering Act.
With the Excess Profits Tax they have less
inducement than usual to maximise profits. In
short, it eases their consciences, saves them trouble,
and does not even cost them much, to clear their
shelves and leave the next customer unsatisfied
rather than raise their prices to the level which
would equate supply and demand.
Thus the first stage, I suggest, will be a shortage
of supplies rather than a runaway price level.
This will be a singularly unfair, inefficient and
irritating method of restricting consumption.
Vi PREFACE
And if it provokes, as it probably will, more wide-
spread rationing, the waste and inefficiency will
be aggravated for reasons, explaiaed below, due to
the diversity of men’s needs and tastes. The right
plan is to restrict spending power to the suitable
figure and then allow as much consumer’s choice as
possible how it shall be spent. Moreover, grad-
ually the pressure of spending power will bring
in the tide of inflation, which is nature’s remedy
and the only genuine alternative.
But a further, and even less satisfactory, conse-
quence is also probable. A shortage of supphes
relatively to consumers’ spending power wfil exert
an unfavourable pressure on our balance of trade.
■For it will divert goods from export and give a
stimulus to the use for current consumption of
imports, and home, production too, which might
otherwise have been employed for war purposes.
Thus we shall be prevented from putting forth
our full war effort and we shall run down our
foreign reserves faster than is prudent.
A reluctance to face the full magnitude of our
task and overcome it is a coward’s part. Yet the
nation is not in this mood and only asks to be
told what is necessary. It is a fool’s part too.
For victory may depend on our making it evi-
dent, that we can so organize our economic
strength as to maintain indefinitely the excommu-
nication of an imrepentant enemy from the com-
merce and society of the world.
J. M. Keynes
King’s College, Cambridge
F^ruary, 1940
CONTENTS
OSAFTEB PAGE
I. The Chahacteb of the Peobi^bm . l
II. The Chaeaoteb op ihe Solution . 8
III. OuB Output Capaoett and the National
Income 13
IV. Can the Eioh pay fob the WabI . 20
V. A Plan fob Defehbed Pay, Family
Allowances and a Cheap Ration . 27
VI. Details 34
Vn. The Release of Defebeed Pay and a
Capital Levy 44
Vni. Rationing, Peioe Control and Wage
Control 61
IX. Voluntary Saving and the Mechanism
OF Inflation 57
X. The System adopted in Fbanoe. . 74
APPENDICES
I. The National Income. ... 79
n. The Extent of oub Resources Abroad 82
III. The Cost of Family Allowances . 86
IV. The Fobmula fob Defebeed Pay . 87
Acknowledgments .... 88
HOW TO PAY FOE THE WAK
CHAPTER I
THE CHAJRAOTER OE THE PROBLEM
It is not easy for a free community to organise
for war. We are not accustomed to listen to
experts or prophets. Our strength lies in an
ability to improvise. Yet an open mind to im-
tried ideas is also necessary. No-one can say
when the end will come. In the war services it
is recognised that the best security for an early
conclusion is a plan for long endurance. It is
ludicrous to proceed on a different assumption in
the economic services; — ^which is what we are
doing at present. On the economic front we lack
— to borrow a phrase of M. Reynaud — ^not
material resources but lucidity and courage.
Courage will be forthcoming if the leaders of
opinion in all parties will summon out of the
fatigue and confusion of war enough lucidity of
mind to understand for themselves and to explain
to the public what is required; and then propose
a plan conceived in a spirit of social justice, a
plan which uses a time of general sacrifice, not
as an excuse for postponing desirable reforms,
but as an opportunity for moving further than
we have moved hitherto towards reducing in-
equalities.
1
2
HOW TO PAY FOR THE WAR
More lucidity, therefore, is our first need. This
is not easy. !For all aspects of the economic
problem are interconnected. Nothing can be
settled in isolation. Every use of our resources
is at the expense of an alternative use. And when
we have decided how much can be made avail-
able for civilian consumption, we have still to
settle the thorniest question of aU, how to dis-
tribute it most wisely.
We shall, I assume, raise our output to the
highest figure which our resources and our organi-
sation permit. We shall export aU we can spare.
We shall import all we can afford, having regard
to the shipping tonnage available and the maximum
rate at which it is prudent to use up our reserves
of foreign assets. From the sum of our own
output and our imports we have to take away
our exports and the requirements of war. Civilian
consumption at home will be equal to what is
left. Clearly its amount will depend on our policy
in the other respects. It can only be increased
if we diminish our war effort, or if we use up
our foreign reserves.
It is extraordinarily difficult to secure the right
outcome for this resultant of many separate
policies. It depends on weighing one advantage
against another. There is hardly a conceivable
decision within the range of the supply services
which does not affect it. Is it better that the
War Office should have a large reserve of uniforms
in stock or that the cloth should be exported to
increase the Treasury’s reserve of foreign currency?
Is 'it better to employ our shipyards to build war
3
THE CHARACTER OF THE PROBLEM
ships or merchant-men? Is it better that a
20-year-old agricultural worker should be left
on the farm or taken into the army? How
great an expansion of the Army should we
contemplate? What reduction in working hours
and efficiency is justified in the interests of
A.R.P.? One could ask a himdred thousand
such questions, and the answer to each would
have a significant bearing on the amount left
over for civilian consumption.
We can start out either by fixing the standard
of life of the civilian and discover what is left
over for the service departments and for export;
or by adding up the demands of the latter and
discover what is left over for the civilians. The
actual result will be a compromise between the
two methods. At present it is hard to say who,
if anyone, settles such matters. In the final
outcome there seems to be a larger element of
chance than of design. It is a case of pull devil,
puU baker — ^with the devil so far on top.
But it makes no great difierence to the problem
we are now discussing whether the final result
is arrived at wisely or foolishly, by chance or
by design. On the assumption that our total
output is as large as we know how to organise,
a definite residual will be left over which is avail-
able for civilian consumption. The amount of
this residue will certainly be influenced by the
reasonable requirements of the civilian population.
If an acute shortage develops in a particular
direction, baker’s puU will become stronger and
devil’s weaker; and something will be done to
4 HOW TO PAY FOR THE WAR
allow a larger release. But unless we are to fall
far short of our maximum war effort, we can-
not allow the amount of mere money in the
pockets of the public to have a significant influence,
unjustified by other considerations, on the amount
which is released to civilians.
This leads up to our fundamental proposition.
There will be a certaiu definite amount left over
for civilian consumption. This amount may be
larger or smaller than what perfect wisdom and
foresight woidd provide. The point is that its
amount will depend only to a minor extent on
the amount of money in the pockets of the public
and on their readiness to spend it.
This is a great change jfiom peace-time exper-
ience. That is why we find it difficult to face
the economic consequences of war. We have
been accustomed to a level of production which
has been below capacity. In such circumstances,
if we have more to spend, more will be produced
and there will be more to buy. Not necessarily
in the same proportion. Supply for immediate
consumption may not increase as much as demand,
so that prices wfil rise to some extent. Never-
theless, when men were working harder and earning
more, they have been able to increase their con-
sumption in not much less than the same pro-
portion.
In peace time, that is to say, the size of the
cake depends on the amount of work done. But
in war time the size of the cake is fixed. If we
work harder, we can fight better. But we must
not consume more.
THE CHAHACTER OF THTT, PROBLEM 6
This is the elementary fact which in a demo-
cracy the man in the street must learn to under-
stand if the nation is to act wisely — ^that the size
of the civilian’s cake is fixed.
What follows from this?
It means, broadly speaking, that the public as
a whole cannot increase its consumption by
increasing its money earnings. Yet most of us
try to increase our earnings in the belief that
we can thus increase our consumption, — ^which is
usually true. Indeed in a sense it is true still.
For each individual can increase his share of
consumption if he has more money to spend.
But, since the size of the cake is now fixed and
no longer expansible, he can only do so at the
expense of other people.
Thus, what is to the advantage of each of us
regarded as a solitary individual is to the dis-
advantage of each of us regarded as members of
a community. CH all alike spend more, no one
benefits. Here is the ideal opportunity for a
common plan and for imposing a rule which
everyone must observe. By such a plan, as I
hope to show, the wage and salary earner can
consume as much as brfore and in addition have
money over in the bank for his future benefit
and security, which would belong otherwise to
the capitalist class.)
Without such a plan we shall consume no more
than otherwise, but wUl have spent all oiur money
and have nothing over. For prices will rise just
enough for the money we spend to be used up
by the increased cost of what there is to buy.
6 HOW TO PAY FOR THE WAR
If all earnings are raised two shillings in the £
and are spent on buying the same quantity of
goods as before, this means that prices also mil
rise two shillings in the £; and no one will he a
loaf of bread or a pint of beer better off than
he was before.
Unless the whole cost of the war were to be
raised by taxes which is not practically possible,
part of it will be met by borrowing, which is
another way of saying that a deferment of money
expenditure must be made by someone. This will
not be avoided by (allowing prices to rise, which
merely means that consumers’ incomes pass into
the hands of the capitalist class. A large part
of this gain the latter would have to pay over
in higher taxes; part they might themselves
consume thus raising prices stiU higher to the
disadvantage of other consumers; and the rest
would be borrowed from them, so that they alone,
instead of aU alike, would be the principal owners
of the increased National Debt, — of the right, that
is to say, to spend money after the war.^
For this reason a demand on the part of the
Trade Unions for an increase in money rates of
wages to compensate for every increase in the
cost of living is futile, and greatly to the dis-
advantage of the working dass. Like the dog
in the fable, they lose the substance in gaping
at the shadow. It is true that the better organised
sections might benefit at the expense of other
consumers. But except as an effort at group
selfishness, as a means of husthng someone else
out of the queue, it is a mug’s game to play.
7
THE CHAHACTER OF TBDE PROBLEM
In their minds and hearts the leaders of the Trade
Unions know this as well as anyone else. They
do not want what they ask. But they dare not
abate their demands until they know what
alternative policy is offered. This is legitimate.
No coherent plan has yet been put up to them.
I have been charged with attempting to apply
totalitarian methods to a free community. No
criticism could be more misdirected. In a totali-
tarian state the problem of the distribution of
sacrifice does not exist. That is one of its initial
advantages for war. (it is only in a free community
that the task of government is complicated by the
claims of social justice) In a slave state produc-
tion is the only problem. The poor and the old
and the infant must take their chance ; and no
system lends itself better to the provision of
special privileges to the governing class.
I The aim of these pages is, therefore, to devise
a means of adapting the distributive system of a
free community to the limi tations of war. There
are three main objects to hold in view: the pro-
vision of an increased reward as an incentive and
recognition of increased effort and risk, to which
free men unlike slaves are entitled ; the maximum
freedom of choice to each individual how he will
use that part of his income which he is at liberty
to spend, a freedom which properly belongs to
independent personalities but not to the units
of a totalitarian ant-heap; and the mitigation
of the necessary sacrifice for those least able to
bear it, a use of valuable resources which a ruthless
power avoids.)
8
HOW TO PAY FOR THE WAR
CHAPTER n
THE CHARACTER OF THE SOLUTION
Eve>’ if there were no increases in the rates of
money-wages, the total of money-camings will be
considerably increased by the greater number of
insured men engaged in the services and in civilian
employments, by overtime, and b}' tlie movement
into paid employment of women, bo3’S, retired per-
sons and others who were not previously occupied.
It wiU be shown in the next chapter, what is
fairly obvious to common sense, that (in a war
like this the amount of goods available for con-
sumption will have to be diminished, — and cer-
tainly cannot be increased above what it was in
peace time.)
(^It follows that the increased quantity of money
available to be spent in the pockets of consumers
will meet a quantity of goods wliich is not in-
creased. Unless we establislr iron regulations
limiting whnt is to be sold and establishing
maximum prices for every article of consumption,
with the result that there is nothing left to buy
and the consumer goes home with the money
burning his pocket, there are only two alternatives.
Some means must be found for withdrawing pur-
chasing power from the market; or prices must
rise until the available goods are selling at figures
which absorb the increased quantity of expendi-
ture, — ^in other words the method of inflation^
THE CHAHACTER OF THE SOLUTION 9
(The general character of our solution must be,
therefore, that it withdraws from expenditure a
proportion of the increased earnings. This is the
only way, apart from shortages of goods or higher
prices, by which we can secure a balance between
money to be spent and goods to be bought.)
(.Voluntary savings would serve fhis purpose if
they were sufficient.) In any case volimtary savings
are wholly to the good and limit to that extent
the dimensions of our problem. No word should
be said to discourage the missionary zeal of those
who campaign to increase them or the self-
restraint and public spirit of those who make
them. Nor is there anything in the plan which
follows to make voluntary personal economy use-
less or unnecessary. I aim at a scheme which will
achieve the bare minimum; and by the time it
has been qualified by practical concessions nothing
is more likely than that it will fall short of the
bare mmiTmim, and will not be sufficient by itself.
Every further economy in personal consumption
beyond what is prescribed will either ease the
position of some other consumer or will allow an
intensification of our war effort.
(But the analysis of the national potential and
of the distribution of the national income, which
will be given in the next two chapters, shows
clearly enough how improbable it is that volun-
tary savings can be sufficient. Those who allege
otherwise are deceiving themselves or are victims
of their own propaganda. Moreover, many people
would, I thiiffi, welcome a prescribed plan which
indicates to them their minimum duty ; and those
10 HOW TO PAT POB THE WAB
who feel moved to do more can rest assured that
their effort is not useless. A TuiniTmini plan will
not close the way to the voluntary self-sacrifice
of individuals for the public good and the national
purpose, any more than our system of taxation
does. The nation will still need urgently the firuits
of further personal abstention, — always bearing
it in mind that some forms of economy are much
less valuable than othera. But I also reckon it a
merit of a prescribed plan that it reduces for the
average man the necessity for a continuing
perplexity how much to economise and for think-
ing about such things more than is goodj An
excessive obsession towards saving may be more
useful than lovely; it is not always he who decides
to save who makes the real sacrifice; and public
necessity may sometimes become an excuse for
giving full rein with self-approval to an instinct
which is also a vice.
The fir st provisio n in our radical plan (Chapters
V and VI) is, therefore, (to determine a proportion
of each man’s earnings which must be deferred;
— ^withdrawn, that is to say, from immediate
consumption and only made available as a right
to consume after the war is over. J£ the propor-
tion can be fixed fairly for each income group,
this device wfil have a double advantage. It
means that rights to immediate consumption
during the war can be allotted with a closer regard
to relative sacrifice than under any other plan.
It also means that rights to deferred consumption
after the war, which is another name for the
National Debt, will be widely distributed amongst
THE CHARACTER OF THE SOLUTION 11
all those who are foregoing immediate consump-
tion, instead of being mainly concentrated, as they
were last time, in the hands of the capitalist class.')
(The se cond provi sion is to provide for this
deferred consumption without increasing the
National Debt by a general capital levy after the
war.)
(The th ird provis ion is to protect from any
reductions in current consumption those whose
standard of life offers no sufficient margin. This is
effected by an exempt minimum, a sharply
progressive scale and a system of family allow-
ances. The net result of these proposals is, to
increase the consumption of young families with
less than 76s. a week, to leave the aggregate
consumption of the lower income group having
£6 a week or less nearly as high as before the
war (whilst at the same time giving them rights,
in return for extra work, to deferred consumption
after the war), and to reduce^the aggregate con-
sumption of the higher income group with more
than £6 a week by about a third on the average.)
The fo urth provision (Chapter VDI), rendered
possible by the previous provisions but not itself
essential to them, is to link further changes in
money-rates of wages, pensions and other allow-
ances to changes in the cost of a limited range of
rationed articles of consumption, an iron ration
as it has been called, which the authorities wiU
endeavour to prevent, one way or another, from
rising in price.
This scheme, put forward in the Ught of
criticism and after further reflection, is more
12 HOW TO PAY FOR THE WAR
comprehensive than the plan for deferment of in-
come which I proposed in the columns of The Times
last November. Nevertheless this original proposal
is the lynchpin of the whole construction, failing
which the rest would be impracticable. Without
this proposal the cost of family allowances would
aggravate the problem of consiunption by increas-
ing it in one direction without dinunishing it in
another; and would merely make the progress
of inflation more inevitable. The same is true of
an iron ration at a low price. Unless we have first
of all withdrawn the excess of purchasing power
from the market, the cost of subsidising con-
sumption win lead the Treasury deeper into the
financial bog. But if a deferment of earnings is
agreed, the whole construction stands solid.
A general plan like this, to which aU are required
to conform, is like a rule of the road — everyone
gains and no one can lose. To regard such a rule
as an infrmgement of liberty is somewhat silly.
If the rule of the road is imposed, people will
travel as much as before. Under this plan people
will consume as much as before. The rule of the
road allows people as much choice, as they would
have without it, along which roads to travel.
This plan would allow people as much choice as
before what goods they consume.
A comparison with the rule of the road is a
very fair comparison. For the plan is intended to
prevent people from getting in one another’s way
in spendLig their money.
OUTPUT CAPACITY A2SD NATIONAL INCOME 13
CHAPTER m
OUE OUTPUT CAPACITY AND THE
NATIONAL INCOME
In order to calculate the size of the cake which
will be left for civilian consumption, we have to •
estimate
(1) the maximum current output that we are
capable of organising from our resources of
men and plant and materials,
(2) how fast we can safely draw on our foreign
reserves by importing more than we export,
(3) how much of all this will be used up by our
war effort.
The statistics from which to build up these
estimates are very inadequate. Every govern-
ment since the last war has been unscientific and
obscurantist, and has regarded the collection of
essential facts as a waste of money. There is no
one to-day, inside or outside government offices,
who does not mainly depend on the brilliant
private efforts of Mr. Colin Clark (in his National
Income and Ouday, supplemented by later articles) ;
but, in the absence of statistics which only a
government can coUeot, he could often do no
better than make a brave guess. The basis of
what follows is given in more detail in Appendix
I, prepared with the assistance of Mr. E. Eothbarth.
The money measure of our output capacity will,
of course, vary according to the levels which are
14
HOW TO PAY FOR THE WAR
reached from time to time by wages and prices.
To avoid this complication the following figures
are all given m terms of pre-war prices.
In the year ending March 31, 1939, the value
of our output, measured at cost, including invisible
exports, was about £4,800 million. Of this amount
£3,710 million fFas the current cost (inclusive of the cost
of mamtaining plant) of the consumption of
the public ;
£850 million was the current cost (inclusive of the cost of
maintenance) of the services provided by the
Government, excluding “transfer” payments
to pensioners and holders of the national
debt, etc., since these are merely out of one
pocket into another, but including capital
expenditure ;
£290 million was devoted to increasing our privately
owned capital equipment in the shape of
buildings, plant and transport.
£4,850 million
This output can be increased (1) by absorbing
a considerable proportion of the 12f per cent of
insured workers who were imemployed in that year,
(2) by bringing into employment workers from out-
side the insured population, including boys, women
and retired or unoccupied persons, and (3) by more
intensive work and overtime (a lengthening of
working hours by half an hour would, for example,
yield an increase of about per cent). On the
other hand, there will be a loss of efficiency from
withdrawals to the armed forces (whose out-
put should be measured, if it is to tally with
the other side of the balance-sheet, by the cost
16
OUTPUT CAPACETY AND NATIONAL INCO
of their pay, allowances and keep), from shortage
of raw material and shipping, and from A.R.P.
On balance an increase in output of 16 to 20 per
cent should be practicable when our organisation
is working properly. Taking an intermediate
figure of just imder 17^ per cent, let us assume an
increase of £825 million in the value of oul^ut
measured at pre-war prices. It is important to
add that no such rise in output has taken place
as yet.
There are two other sources from which govern-
ment requirements can be met. Included in the
cost of public and private consumption there is a
figure of £420 million for the cost of making good
current depreciation, in addition to about £300
million spent on additions to capital. Some of
this output, costing £710 (£420-f£290) million
altogether, could be diverted to government pur-
poses. Let us put the contribution from this source
at £160 million from depreciation funds and £300
million from normal new investment, making £450
million altogether.
The second and only remaining source is from
selling our gold and foreign investments and
borrowing abroad. If we are to be prepared for
a prolonged war, we must be strict with ourselves
in hmifing the rate at which we expend these
resources. I put the maximum contribution which
we can safely take from this source in a year at
£350 -mini nri.i
Altogether this yields us resources for additional
government requirements and current private
^ Some details in justification of this figure are given in Appendix H*
16 HOW TO PAY FOR THE WAR
consumption of £1,625 (£825+£450+£350) million
a year.
What relation does this bear to present facts?
The Chancellor of the Exchequer announced in
the late autumn of 1939 that the rate of govern-
ment expenditure already reached represented an
increase of somewhere in the neighbourhood of
£1,500 mill ion a year. Thus if we had already
reached the increased rate of output asanmfifl
above, we should have had at that time a small
margin (of £125 million) out of which private
consumption could be increased. But everyone
knows that we were, and stiU are, a long way
from having organised output on this scale.
Indeed it is certain, in my opinion, that the
existing rate of government expenditure leaves
no margin for increased private consumption;
and that the maintenance of consmnption is
already leading to a reduction in stocks of com-
modities and of foreign reserves at a higher rate
of depletion than that assumed above, — at a
higher rate, that is to say, than is safe.
Moreover it is certain that our war expenditure
has not yet reached its maximum. Let us assume
that in the next year government expenditure
rises by no more than a further £350 milb on
above the estimated level of last autumn, and that
we are successful in raising our output to the maxi-
mum suggested above, which is an optimistic view
of the prospects. This will involve a reduction of
£226 million below the pre-war rate of consumption
for the community as a whole. We have, therefore,
to withdraw from consumption £825 milhon of
OUTPUT CAPACITY AITO NATIONAL INCOME 17
increased incomes 'plus £225 million of incomes
previously spent.
That is a modest statement of the problem.
Some would say that it is a serious understate-
ment, which allows inadequately for the magnitude
of the war effort which will be needed. This may
be true. Moreover, unless we mend our ways
quickly, it greatly overstates our rate of output.
Nevertheless, to establish my present argument
it is not necessary to go beyond what is already
plain. If a greater decrease in consumption proves
necessary, that will reinforce aU that I have to say.
Now we can see what the problem is and how it
comes about. Even if there are no increases in
wage-rates or in prices, incomes will rise by an
amount equal to what is earned in producing the
increased output, namely £825 million a year on
the above assumptions. Yet in spite of these
increased incomes, those who receive them must
consume less than before. Whilst earnings will
be increased, consumption must be diminished.
That is the conclusion to hammer home. It is
beyond dispute. And it is gradually penetrating
to the general consciousness. But we have become
so accustomed to the problem of unemployment
and of excess resources that it requires some
elasticity of mind to adapt our behaviour to the
problem of full employment and of resources
which are no longer adequate to supply our needs.
In war we move back from the Age of Plenty to
the Age of Scarcity.
Moreover the imminence of the new problem
has been obscured from our eyes by the fact that
18 HOW TO PAY FOR THE WAR
after nearly six months of war there still persists
a substantial volume of statistical unemployment.
This is due to a failure of organisation, partly
unavoidable in so short a space of time, partly
avoidable if there was more energy and intelli-
gence in the government. But anyone who argues
from this that we are still in the Age of Plenty
' makes a mistake. The nature of unemployment
^ to-day is totally different from what it was a
,;Ji-year ago. It is no longer caused by a deficiency
of demand. There is no longer a potential surplus
supply of the things we want. The transition to
full employment is hindered by two obstacles.
The first is due to the diffiiculty of shifting labour
to the points where it is wanted. The second —
and, for the time being, the chief— obstacle is
caused by the dildculties, other than the shortage
of labour, in the way of existing demand becoming
effective. For example, there may be a demand
for cloth on the part both of exporters and of
home consumers and there may be less than full
employment in the woollen industry, and yet this
demand will remain ineffective if the manufacturers
cannot — ^for one reason or another, good or bad —
obtain raw wool for the purpose of meeting these
demands. Shortages of essential raw materials due
to shipping delays and other causes, and artificial
shortages due to the ineflS.cient workings of our
newly-bom controls who carmot learn their un-
accustomed job aU at once, are in many cases a
more limit iTig factor than the shortage of labour.
And in other cases there is a shortage of plant.
But I repeat that this does not mean we 'are
OUTPUT CAPACITY AND NATIONAL INCOME 19
still in the Age of Plenty. It means that the Age
of Scarcity has arrived before the whole of the
available labour has been absorbed. I am not
saying that our output cannot be increased beyond
its present level. Surely it can and must be so
increased as our organisation improves. But we
are already making all we know how. We have
to learn Tioio to make more ; and that takes time.
Our ability, for the time being, to draw on stocks
is another factor which is obscuring from our eyes
the transition to the Age of Scarcity. There can
be little doubt that during the first months of
war our rate of private consumption has exceeded
our surplus of production on a scale which cannot
be continued indefinitely. Government demand
has been greatly increased. There is no reason
to suppose that private consumption has been
suflSciently diminished. It is by drawing on our
stocks of commodities and foreign resources and
on our working capital that the deficiency has
been met. The task of adjusting private expend-
iture to the supply which will be available is, there-
fore, more urgent than appears on the surface.
It is not true that we can postpone action until
after full employment has been reached.
The magnitude of the problem is now stated.
The reader will appreciate that there is unavoid-
able guess work and crude approximation in the
figures which I have given. If anyone knows
better, his criticism be welcome. But I
believe that the size of the result is roughly right
and that more accurate details would not change
the broad outline of the picture.
20
HOW TO PAY FOR THE WAR
CHAPTEB. IV
CAN THE RICH PAY FOR THE WAR?
We have sho-vm that, qtdte apart from war in-
creases in rates of wages, the earnings of the
country as a whole should increase by as much
as £825 million merely as a result of the increase
in output and employment. At the same time
private consumption will have to diTuiniRb by at
least £175 miUion, taking a moderate estimate.
Thus altogether £1,000 million of private incomes
must be withdrawn from consumption. This
figure has been reached on the basis of pre-war
wages and prices. Since significant rises in these
have abeady occurred, aU our figures should be
somewhat increased in terms of present prices
and wages. By the end of January 1940, whole-
sale prices had risen by 27 per cent, the cost of
living (seasonally corrected) by 10 per cent, and
wages by perhaps 5 per cent; which means that
the aggregates I am using should be increased by
nearly 10 per cent to conform to the wage and
price levels current at that date.
I have heard it argued that, whilst these figures
may be correct, they do not prove that the work-
ing class need be asked to make any sacrifice.
Admittedly they will work harder. But if so theb
consumption must be increased proportionately.
If the cost of hviug rises, wage-rates, and not
merely total earnings, must be increased to the
CAN THE RICH PAY FOR THE WAR? 21
same extent. The whole of the real cost of
the war, it is claimed, should be borne by the
richer classes. Nay, more. The increased de-
mand for the services of labour due to the war,
offers a much-needed opportunity for increasing
working-class consumption above what it was
previoudy.
Do the workers really claim that they alone
should be war-profiteers, taking advantage of the
war to increase their consumption, and that more
than the whole of the burden of the war should
be borne by others? Or is it only some of their
leaders who are claiming this on their behalf?
This is a political question to which I am not
competent to give an answer. Nor is it necessary
that I should do so.
For, fi:om the practical point of view, I doubt if
this is one of the alternatives offering. At any
rate, it is not something which will come about
automatically as a result of having no policy and
doing nothing. If we drift without a compre-
hensive plan, not this but inflation or shop-
shortages win result. And inflation, as we shall
see, will be to the clear advantage of the richer
class and will result in this class bearing not more,
but less, than their fair share. I shall have to
urge more than once before I have finished, that
my proposals should be compared, not with some
imaginary alternative, but with actual alterna-
tives which are happening, or about to happen,
before our eyes.
Let us, however, examine the facts. Once
again the figures which I use are no better than
22 HOW TO PAY FOR THE WAR
rough, approximations of the truth. We do not
know accurately how the national income is dis-
tributed between different income-groups, although
this is clearly a matter of the &st importance.
There is some fairly good evidence of the pro-
portions belonging to those with less than £250
a year and to those with more than £2,000 a year;
but for the important intermediate groups the
information is defective. But whilst many details
in the following are probably inaccurate, I do not
think that the picture as a whole is misleading.
As before, we shall use pre-war prices and wages
as our measuring rods ; for, if we depart from these,
we are on shifting sands.
We will begin with the sum-total of personal
incomes before the war, (See Appendix I for the
basis of this total), add to this the prospective
war increase, and take away the rates and taxes
which were already being paid in the pre-war
years :
Income groups
Retow £250 £260-£500
Above £500
Total
f
£
£
£
million
million
million
million
Pre-war
2,910
6«)
1,700
5,250
War increase
425
100
300
826
Total war in-
incomes .
3,336
740
2,000
6,076
Pre-war rates
and taxes
390
60
780
1,220
£2,945
690
1,220
4,855
^ Th© groups ar© to be ioterproted to cover those who were in
these pre-war, even though war increases may be moving them into
higher income groups.
CAN THE RICH PAY FOR THE WAR? 28
The last row of figures leaves us with the
incomes out of which the increased war expendi-
ture. has to be met either by additional taxes or
by borrowing, after allowing for what can be
provided out of existing capital. (The manner in
which the income-group from £250 to £600 is at
present escaping its proper share of taxes is strik-
ingly brought out. They actually paid a much
smaller proportion of their pre-war incomes than
the lower income-group below £250, namely 7‘8
per cent compared with 13*4 per cent.)
The figure which we have taken in Chapter HI
for the increased expenditure of the Government
is £1,850 million, of which £160 million could be
taken out of accruing depreciation not made good
at home and £350 million from assets and borrow-
ing abroad before allowing anything for normal
saving. This leaves £1,360 million to be raised from
additional taxes and from new savings (including
normal savings) voluntary or involuntary.
We can rely in present circumstances on at
least £400 million of voluntary savings, even if
taxation is raised to a high level and if the proposal
for deferred income made below is also adopted.
Indeed I believe that this figure is considerably
below the most probable expectation which might
be put as much as £160 million higher; and I am
reserving this margin against errors in the opposite
direction elsewhere in the calculation. I include in
this at least £100 million accruing in the hands of
the Government in the Unemployment Fund,
Health Insurance and Pension Funds, War Risk
Funds and the like; which is best regarded as
24 HOW TO PAY FOR THE WAR
diminishing the net Government demands on the
public by this amount, since it cannot easily be
allocated to the personal savings of any group. In
addition fuUy £300 million are likely to accumulate
through Building Societies, Life Offices, Super-
aimuation Funds, the undistributed profits of com-
panies (which alone were estimated at £300 million
pre-war) and other institutional channels, even if
individuals make no voluntary savings in addition
to the other demands made on them. If this sum
is allocated somewhat arbitrarily (for exact infor-
mation is lacking) between the different income
groups, we are left with the following:
hieome grovm Below £250
£250-£600
Above £500
Total
£
£
£
£
million
million
million
million
War incomes
less pre-war
taxes
2,945
690
1,220
4,855
Minimum vol-
untary savings
60
75
176
300
2,896
615
1,045
4,565
out of which £950 million has still to be found
for the Government. Even allowing for a wide
margin of error in this calculation, it shows that
if everyone with more than £500 a year had the
whole of his income in excess of that sum taken
from bim in taxes, the yield would not be nearly
enough,^ being £625 mfllion or only two-thirds of
the Government’s requirements.
' Tbsie are about 840,000 heads of households with more than
£500 a year and their aggregate war incomes, alter deducting pre-war
taxes and tniTiitnntn saving, is put above at £1,046 million, whioh leaves
£636 million after deducting £600 per head.
CAN THE RICH PAY FOR THE WAR? 25
Yet this suggestion is a wild exaggeration
beyond what could be expected from our fiscal
system. Indeed taxation on this scale would in-
volve such wide-spread breaches of existing con-
tracts and commitments that the taxable incomes
themselves would be largely reduced. An import-
ant part of these incomes is spent on rates and
other purposes which do not increase personal
consumption, on current resources, the alternative
uses of which are much less valuable, and on pay-
ments to dependants. It follows that an important
contribution must be obtained one way or another
from the income group below £500 a year.
Nor is it practicable to put the exemption limit
at £250 a year. There are about 2,430,000 persons
with incomes above this level. If the whole of
the excess of their remaining incomes above £250
was taken from them, namely £1,050 million^ and
if this caused no reduction in the incomes by
repercussion (which is far from the truth), it
would only just exceed the Government’s
requirements. If the cost of the war is to be
met by the income group above £250 a year, it
would mean taking from them in savings and
taxation (new and old) about three-quarters of
their total war-time incomes, leaving them with
less than a quarter of their incomes for their own
consumption.
In the light of these figures it is not sane to
suppose that the war can be financed without
putting some burden on the increased war incomes
Total available incomes of this group £1,660 million less about
£610 million (in respect of 2,430,000 at £260 each}.
26 HOW TO PAY FOR THE WAR
of tlie class -witli £5 a week or less. For this
mcome group accounts for about 88 per cent of
tbe population, for more than 60 per cent of
the total personal incomes of the country after
allowing for war mcreases (due to greater output
but allowing nothing for higher wage-rates) and
deducting pre-war rates and taxes, and for about
two-thirds of current consumption. Moreover the
incomes of this group will have been increased on
the average by some 15 per cent as a result of the
war. Is it seriously expected that those with less
than £6 a week will be allowed to increase their
average consumption by 15 per cent, while all
those with more than £5 a week will be left on the
average with only a quarter of their incomes to
consume? The only question is, therefore, how
large the contribution of this class must be,
and how it can be obtained with least sacrifice
and most jizstice.
If we have a deliberate plan, considerations
of social justice can be weighed and considered.
Without such a plan (as at present) they go by
default.
As a basis of discussion I offer in the next two
chapters a proposal, capable, I expect, of amend-
ment and improvement in a hundred details, but
embodying a principle which will achieve more
social justice than any other plan. It should be
judged by comparison, not with some imaginary
alternative or unattainable counsels of perfection,
but with what is actually happening before our
eyes.
DEFERBED PAY, ALLOWANCES AND RATION 2T
CHAPTER V
A PLAN FOR DEFERRED PAY, FAMILY
ALLOWANCES AND A CHEAP RATION
I HAVE now readied a stage in the argument where
I have to choose between being too definite or
being too vague. If I set forth a concrete proposal
in all its particulars, I expose myself to a hundred
criticisms on points not essential to the principle
of the plan.' If I go further in the use of figures
for illustration, I am involved more and more
in guess-work; and I run the risk of getting the
reader bogged in details which may be inaccurate
and could certainly be amended without injury
to the main fabric. Yet if I restrict myself to
generalities, I do not give the reader enough to
bite on; and am in fact shirking the issue, since
the size, the order of magnitude, of the factors
involved is not an irrelevant detail.
I propose to run the risk of giving too many
details and estimates rather than too few, — ^rely-
ing on the reader’s benevolent understanding of
my method. But I may help him to distinguish
between principles which are essential and details
which are illustrative if I begin, in this chapter,
with some generalities (though not entirely
divorced &om figures), leaving to the next one
the blueprint.
We have reached the broad conclusion that
(allowing for the increase in war output and taking
28 HOW TO PAY FOR THE WAR
credit for the pre-war yield of taxes and for those
savings on which we can rely in any case, there
r emains about £950 milhon of incomes in nrivat e
h ands whic h, must not be spent but must b e
d iverted to the finance of the w ar.")
I suggest that perhaps as much as one half of
this, namely £600 million, can be raised by taxa-
tion. Indeed in a full year and disregarding time-
lags in collection the war taxes already imposed
in Sir John Simon’s emergency budget may pro-
vide £400 miUion towards this. I include in this
at least £100 million from Excess Profits Tax even
if we avoid any significant degree of inflation.
Inflation would, of course, greatly increase the
yield of this tax; but the yield should be sub-
stantial even without this adventitious aid, partly
as a reflection of the higher level of output and
partly on account of the distribution ' of profits
between individual businesses being materially
different from what it was in the base year. Other
fiscal devices, including a sales-tax on certain
classes of non-necessities, should be capable of
finding another £100 million. But it would not
be easy for our fiscal machine to raise much more
than this with due regard to justice and efficiency,
except by a general sales-tax, a wages-tax or the
use of inflation as a tax-gatherer.
The idea of bridging the rem aini ng gap of £^0
million, in addition to the £400 million for which
we have already taken credit, by voluntary
savings without any aid from inflation is chimer-
ical. It must be remembered that we have
already assumed an annual subscription by the
DEFERRED PAY, ALLOWANCES AND RATION 29
public to government loans of £900 million (£350
in exchange for foreign assets, £150 from de-
preciation funds and £400 from new savings) less
such amount as accrues for investment in
government funds etc., from overseas borrowing
and from the proceeds of sales of gold; for the
total increased expenditure of the Grovemment
is not £950 million a year but (on our assumptions)
£1,850 million. For reasons we have already
given, the additional savings would have to come
largely from the income group with £5 a week or
less and would require a change in their habits
of expenditure for which there is no evidence.
For these same reasons the amount by which
the potential expenditure of the lower income-
groups has to be curtailed will be more or less
the same whichever method is adopted. Inflation
will be the most burdensome alternative, since
this will inevitably bring some advantage to the
entrepreneur class, and might cost the worker
20 per cent in terms of the real value of his earn-
ings. Inflation will also be the most burdensome
on the smallest incomes, — a defect it shares with
a general sales-tax. New taxes, such as a sales-
tax or a wages-tax, or old taxes aided by infla-
tion are alikft in that they finally deprive the
workers of the benefit of their earnings from their
heavier burden of labour. They will work harder,
but, as a group, they wiU never derive any per-
sonal benefit from it. That is what wiU happen,
will inevitably happen, if the Treasury and the
Trade Union leaders agree on the one thing where
they will find agreement easiest, namely to drift
30 HOW TO PAY FOR THE WAR
along without a definite policy,' following the usual
methods and rejecting new ideas.
Is there no better way? We have seen that it
is physically impossible for the community as a
whole to consume now the equivalent of their
increased war effort. That is obvious. The war
effort is to pay for the war; it cannot also supply
increased consumption. Tliose who make the
effort have, therefore, only two alternatives be-
tween which to choose. They can forego the
equivalent consumption altogether; or they can
postpone, it.
For each individual it is a great advantage to
retain the rights over the fruits of his labour even
though he must put off the enjoyment of them.
His personal wealth is thus increased. For that
is what wealth is, — command of the right to post-
poned consumption.
This suggests to us the way out. A suitable
proportion of each man’s earnings must take the
form of deferred pay.
With this general principle established, the prac-
tical difficulties of our task begin. If we were to
apply the principle in the crudest possible way
by deferring, let us say a level 20 per cent of aU
income remaining after payment of pre-war taxes,
it would stfil be much better than the alternative
of inflation. But public opinion requires, justly
perhaps, that a deliberate plan, and particularly
that a new plan, should not merely be better than
Hning nothing, but much better. A new plan is
required to meet objections, which apply equally
to the old plan, but which in the case of the
DEFERRED PAY, ALLOWANCES AND RATION 31
latter custom has caused us to forget. The new
plan is required to satisfy ideals of social justice
much higher than we have been attaining without
it.
Let us welcome this demand. If we can make
the upsetting of established arrangements, which
the exigencies of war finance require, the oppor-
tunify to improve the social distribution of in-
comes, all the better.
With this object in view we can add a second
and a third principle to the first principle of
deferring a proportion of current earnings. We
have suggested that about a half of what is
required can be obtained by outright taxes,
leaving a half to be supplied by deferment of
earnings. Let our second principle provide that
the bulk of the new taxes shall fall on the income
groups of £250 or more, and that the main part
of the contribution of the lower income groups
shall take the form, not of foregoing income out-
right, but of merely deferring it.
The third principle must be directed to the
maintenance of adequate minimum standards, —
better and not worse than have existed hitherto.
Thus, whilst the second principle puts heavier
burdens on the richer classes, the third principle
allows special reliefs to the poorer.
To carry out the third principle requires two
distinct proposals. In the scheme which I first
put forward in Th& Times I attempted to deal
with the problem by proposing a minimum exempt
income, this minimum to be increased for a
married man in accordance with the size of his
32 HOW TO PAY FOR THE WAR
family. This proposal was rightly criticised on
the ground that the resulting allowance was
inadequate. The following scheme goes much
further and is, I venture to think, a great
improvement.
For some years past the weight of opinion has
been growing in favom of family allowances. In
time of war it is natural that we should be more
concerned than usual with the cost of living; and
as soon as there is a threat of a rising cost of living
and a demand for higher wages to meet it, the
question of family allowances must come to the
front. For the burden of the rising cost of hving
depends very largely on the size of a man’s
family. At first sight it is paradoxical to propose
in time of war an expensive social reform which
we have not thought ourselves able to afford in
time of peace. But in truth the need for this
reform is so much greater in such times that it
may provide the most appropriate occasion for it.
I share the view held by many others that this
is so. I recommend, therefore, that a family
allowance of Sa. per week should be paid in cash
for each child up to the age of fifteen. I am
estimating the net cost of this at £100,000,000 the
basis for which is explained in Appendix HE.
Is this provision enough? We have to consider
the fairly large class with small incomes which
will not be increased by the war, or at any rate
not sufficiently to keep pace with the increase
in the cost of living. And there is the demand of
the Trade Unions for some security against the
risk that the rise in prices will outstrip the level
DEFERRED PAY, ALLOWANCES AND RATION 88
of wages, even if a scheme for deferred pay or
the Kke is agreed to.
To meet this an important section of opinion,
which has received the weighty support of Sir
Arthur Salter, hli. R. H. Brand and Prof, and
Mrs. Hicks, recommends that a minimum ration
of consmnption goods be made available at a low
fixed price, even though this might involve sub-
sidies. If I were advising the Treasury, I should
look with anxiety on such a proposal taken by
itself, since it might in certain circumstances place
an almost insupportable burden on the Exchequer.
But if it were made part of a comprehensive
scheme, including the deferment of a proportion
of earnings, agreed with the Trade Unions, I
would welcome it.
The minimum ration should not comprise all
the articles covered by the cost of living Index,
but should be restricted to a limited list of
necessaries available in time of war. Nor should
any absolute undertaking be given as to future
prices. It should be agreed, however, that in the
event of any rise in the cost of the minimum
ration, the Trade Unions woidd be free to press
for a corresponding increase in wages.
But it should bo an absolute condition of such
an arrangement that a scheme for deferred pay
should be accepted at the same time, and that the
Trade Unions should agree, subject to the above
safeguard, not to press for any further increases
in money wages on the ground of the cost of living.
Without these conditions the weight of pur-
chasing power available in the hands of consumers
84 HOW TO PAY FOR THE WAR
would render any attempt at price fixation
excessively dangerous. The low prices for the
Tnim'muTU ration would merely release more
purchasing power for use in other directions,
which would drive up other prices to an excessive
disparity with that of the fixed ration. To attempt
to fix consumption prices whilst allowing an
indefinite increase of purchasing power in the
hands of consumers would he an obvious error.
For the Trade Unions such a scheme as this
offers great and evident advantages compared
with progressive infiation or with a wages tax.
In spite of the demands of war, the workers
would have secured the enjoyment, sooner or
later, of a consumption fully commensurate with
their increased effort; whilst family allowances
and the cheap ration would actually improve,
even during the war, the economic position of
the poorer families. We should have succeeded
in making the war an opportunity for a positive
social improvement. How great a benefit in
comparison with a futile attempt to evade a
reasonable share of the burden of a just war,
ending in a progressive inflation!
OHAJPTEB VI
DETAILS
I HAVE avoided in the previous chapter precise
figures of the proportion of earnings to be deferred
and of the TninimuTn standard which should be
85
DETAILS
free from deferment. Those who agree on the
principle may differ on the details. It is better,
therefore, to separate them so far as is possible.
I put forward the following as a basis of discussion.
The details are a question of degree and of opinion.
If these proposals err, it may be in the direction
of making concessions to the income-group below
£5 a week, greater than it will be easy to maintain
— concessions which are, I believe, stiU possible
on the assumption that output is adequately
increased and that government expenditure does
not exceed the estimate given above, but no longer
possible if either of these assumptions fail.
The basis on which the details have been arrived
at is the following: —
(1) The aggregate real consumption of the
group with £5 a week or less should be maintained
for as long as possible at or near the pre-war level.
(2) Those who remain in the lower half of this
gi’oup are likely to have benefited least, or not at
all, from the aggregate increase in war incomes,
and cannot afford, therefore, to have any important
part of their current earnings deferred if they are
to maintain their standard of life.
(3) Since some rise in the cost of living relatively
to wage-rates (though not to total earnings) is
inevitable, and since it is impossible under any
scheme to avoid individual inequalities of treat-
ment, we should make sure by means of family
allowances that the inequality will work out in
favour of households with families, so that these
will be for certain better off.
(4) Since the increased war incomes of the lower
36 HOW TO PAY FOR THF. WAR
income groups probably represent increased work
to a greater extent than in the case of the hi ghar
income groups, the contribution of the former
should be mainly in the form of deferment of
earnings and the contribution of the latter mainly
in the shape of increased taxation.
(5) The increase in the cost of imports is likely
to mvolve an increase in the cost of living relatively
to wages of not less than 5 per cent, even with
the existence of subsidies.
There remains the question whether we can hope
to provide the whole of the £950 million required,
or rather £1,050 million including the cost of
family allowances, by taxation and the deferment
of pay. The proposals, which I put forward in The
Times and the Economic J ournal, were a little faint-
hearted in this respect and avowedly fell short
of what was required. It now seems to me better
to start with a scheme which aims • at being
adequate, even if this is a coimsel of perfection.
For subsequent concessions are sure to whittle
away the yield; so that a scheme which is moder-
ately less than adequate at the start will be
seriously inadequate at the jSnish. Since various
concessions recommended in the next chapter
are likely to cost at least £60 million, I shall
aim, therefore, at a scale of deferment which
should yield £600 million gross.
Whether the actual scales proposed below will
in fact achieve these objects, it is impossible to
forecast with accuracy. They aim at carrying
out the above principles. If it is shown that they
would fail to do so, they can be amended accord-
DETAILS
87
ingly. Put into figures the distribution of the
burden aiTned at is the following: —
Income-Group Below £250
Above £250
Total
million
million
million
Increased Taxes^ .
£150
£350
£600
Deferment of Eaminge .
Loss through relative rise
250
360
600
in the cost of living
125
60
175
£526
£760
£1275
Less increase in war incomes
425
400
825
£100
£350
£450
Less family allowances’ .
£100
—
£100
Decrease in real consump-
tion ....
nil
£350
£350
The loss, estimated above, due to a rise in the
cost of living relatively to wages, allows for a cost
of living 10 per cent above pre-war only partially
offset by a 5 per cent rise in wages. This is,
roughly speaking, the present position. The
estimate assumes that the higher income-group
will be somewhat less affected by this factor than
the lower.
In terms of pre-war real consmnption the final
result means, very roughly, that the aggregate
consumption of the higher income group will be
reduced by fully a third and the aggregate con-
sumption of the lower income group not at all.
'Includuig increased yield of pre-trar taxes.
* For the sake of simplicity, I am assuming that the existing income
tax allowances for ohildten already cost on the average 5a. per child
for the income group about £260, which may or may not be correct.
Probably it is an o\'eiBtatement, since the allowance works out at
3a. Sd. per child up to about £400 earned income, gradually rising
thereafter to 7a. 6d.
38 HOW TO PAY FOR THE WAR
But the reader ■will understand that I am by now
in deep statistical water and that there is room
for serious errors of detail in ^ures which I haye
been bold, perhaps too bold, ■to give.
This distribution of biurden may be open to
the criticism that it demands too heavy a relative
sacrifice ftom the higher income group. It cer-
tainly uses the opportunity of war finance to
effect a considerable re-distribution of incomes in
the direction of greater equality. Does any respon-
sible leader of the working class believe that
rising wage-rates vainly pursuing a rising cost of
living, or any other alternative, will work out
more justly than this or more advantageously to
the lower income group?
It should be a strong recommendation of what
is here proposed that it offers a special protection
to the lowest income-group of £3 a week or less,
who are not benefiting from war increases of earn-
ings, and to family men who are least able to forego
any improvemen^b which may come their way.
What is the best formula to reach this result?
In my Times articles I proposed a formula
which had the advantage of sho-wing the com-
bined result to the tax-payer of direct taxes
and of deferment of pay. This formula was
open to various minor criticisms of detail, which
the Inland Revenue would have to meet in an
actual scheme. But after much reflection I
have not been able to find a better one for
expressing the general purpose and result of the
plan. I am, therefore, retaining it subject to cer-
DETAILS
39
tain changes made necessary by the redistribution
within the lower income group which it is now
proposed to make through family allowances, or
by a more careful consideration of how it inter-
locks with the burden of direct taxes. The revised
formula is given in Appendix IV, and its effects in
detail are shown below.
(1) Children's Allowanjces. The system of chil-
dren’s allowances under the existing income tax
appears highly anomalous when it is examined in
detail. For a man with an earned income of £250,
it works out at £7 per annum for the first child
and nothing for subsequent children ; and it gradu-
ally rises with income to a maximum of £18 15 j.
for every child. For non-income-tax payers there
is no general children’s allowance, though allow-
ances are paid in a number of special cases.
In lieu of the whole of the present system of
children’s allowances, I propose a flat payment
of 5s. per week per child or £13 per annum,
both for income-tax payers and for the insured
population.
(2) Basic minimum income. As the basic
minimum income which should be allowed free
of deferment, I propose 35s. a week to unmarried
and 45s. a week to married men. If different
figures are preferred, this can be adjusted by
altering the percentage to be taken in excess of
the basic Tm'-niTmnri.
(3) Incomes in excess of the basic income. A
percentage of all incomes in excess of the basic
minimum to be paid over to the Government,
partly as direct taxes and partly as deferred pay ;
40 HOW TO PAY FOR THE WAR
the combined percentage to be taken rising steeply
as the level of income increases. The formula
for making the calculations is given in Appendix
IV, but the effect of it at various income levels
is shown more clearly in the following table.
Taking as the standard case the married man with
no young children, the percentage of his income
to be withheld to cover his deferred pay (and also
his income-tax and surtax) works out thus: —
Up to 45/- weekly .
nil
At 60/- .
3J per cent
55/- .
6
60/- .
8|
80/- .
15J
100/- .
19i
£300 annually .
21
400
26
500
27
700
29
1,000
35
2,000
37i
6,000
53J
10,000
64
20,000
76
60,000
80
Over 60,000
85
As will be shown in the next table, the proposed
family allowances make the result far more
favourable than this for the man with young
children in the lower income ranges. With two
children he is a substantial gainer on balance at
aU levels up to 15s. a week.
(4) The division between taoxition and defer-
ment. The appropriate part of a man’s income
withheld imder the above formula will be used to
DETAILS
41
discharge his income tax and surtax if any.
The balance mil he credited to him as a deposit
in the manner to be explained in the next chapter.
The final result of all this in different individual
cases is shomi in the following tables:
Weekly Deferment Existing
earnings of pay Income Tax
Unmarried
35'-
nil
nil
45/-
3/6
nil
63/-
5/0
1/3
151-
9/9
4/3
80/-
10/9
5/-
100/-
14/3
S/6
Married
35/-
nil
nil
45/-
nil
nil
55/-
3/6
nil
73/-
10/6
nil
80/-
12/3
nil
100/-
16/101
3/41
D^crment
Gash
of pay
remaining
Weekly
and Family
for con-
earnings
Income Tax AUmcanee
sumption
Married with
35/-
nil
10/-
45/-
2 young
45/-
nil
10/-
55/-
children
55/-
3/6
10/-
61/6
75/-
10/6
10/-
74/6
80/-
12/3
10/-
77/9
100/-
19/3
10/-
90/9
Married with
35/-
nil
15/-
50/-
3 young
45/-
nil
15/-
60/-
children
55/-
3/6
15/-
66/6
75/-
10/6
16/-
79/6
80/-
12/3
15/-
82/9
100/-
19/3
16/-
95/9
9
42
HOW TO PAY FOR THE WAR
Thus a married man with two young children
has actually more left in cash for all rates of
earnings up to nearly 75s., and with three children
for all rates up to nearly 95s. In addition family
men will have substantial deferred pay credited
to them besides their cash for immediate con-
sumption being increased.
For a married man^ with an earned income
above £5 a week the result is as follows:
Inume. Tax and Income Remaining
Total Iname Surtax payable Deferred Income
£300
£15
400
31
600
93
1,000
218
2,000
562
6,000
2,055
10,000
5,268
20,000
13,018
100,000
80,768
£49
£236
68
301
76
431
135
647
285
1,163
630
2,316
1,156
3,576
1,896
5,088
4,133
16.099
At the higher income ranges the percentage of
income deferred to total income falls considerably.
But it cannot be considered too low if allowance
is made for the enormous sums taken in income
tax and surtax at these ranges. For example at
£100,000, the income deferred is only 4 per cent
of total income, but it is 21^ per cent of the
income which is left after payment of these taxes.
(5) Method of Golleciion. For the insured popu-
lation the method of collection would be the same
also receives £13 per annum for each young child. Aa un-
married man pays from £13 to £16 mere in income tax and has o
little less deferred. There should, perhaps, be an additional allowance
for msiried men in these income ranges.
DETAILS
43
as for social insurance. Each, insured worker
would hold a Deferred Pay Card which would he
stamped by the employer. Eor income-tax payers
the method would be the same as for income-tax.
Eor incomes up to £750 a year the whole question
of deferred pay can be dealt with when con-
sidering income-tax allowances. For surtax payers
the method would he the same as for surtax.
Thus no new machinery either of assessment or
of collection will be required, — a great advantage
for a war-time measure.
In the case of fluctuating earnings, the propor-
tion of deferred pay appropriate to each pay
period would be withheld in the flrst instance.
But this could be adjusted to the proportion
appropriate to the average earnings at quarterly
or any other convenient intervals, since the card
would carry on its face all the information required
for this purpose.
(6) The Depository for Deferred Pay. Consider-
able choice could be allowed to the individual in
what institution his deferred pay should be
deposited. He might choose his Friendly Society,
his Trade Union, or any other body approved for
the purposes of Health Insurance ; or, failing such
preference, the Post Office Savings Bank. Thus
there would be an encouragement to the working-
man’s own institutions to take charge of his
resources for him, and, if desired, a considerable
degree of discretion could be allowed to such bodies
as to the conditions in which these resources could
be released to the individual to meet his personal
emergencies, as is proposed in the next chapter.
44
HOW TO PAY FOR THE WAR
The reader will readily perceive that the same
results could be obtained by reducing the
exemption limits for income tax and raising the
rates of income tax and surtax effective at different
levels of income to the percentages of income set
out in Appendix IV. For those who dislike
fancy schemes and prefer to keep to well-xmder-
stood methods, this is the sound alternative. If
it is accompanied by family allowances, I see no
fiscal objection to this solution. Socially I prefer
the more novel proposal, which retains a stronger
incentive to effort, gives less sense of sacrifice and
indeed requires less, and spreads through the com-
munity the advantages of security, which saved
resources afford, far more widely than before.
CHAPTEE vn
THE RELEASE OF DEFERRED PAY
AND A CAPITAL LE^T
That part of the earnings and other income of
the public to be deferred under this plan would
be placed to the credit of its owner as a blocked
deposit in the friendly society or the approved
institution selected by him, as proposed above,
or, failing such choice, in the Post Ofi&ce Saving
Bank carrying interest at 2| per cent compound
interest. If the yield aimed at in the above
scheme was reached, the gross amount accumu-
lated in this way would amount to about £600
million a year. In fact the accumulations might
DEFERRED PAY RELEASE AND CAPITAL LEVY 45
come to less than this because there are various
concessions which it would be fair to make.
In the first place there are certain definite
commitments to save entered into before the war
which a man might reasonably be allowed to meet
out of his blocked deposit such as instalments due
to a building society, premiums due to a Life
Assurance Office, hire purchase commitments,
and perhaps bank loans. (I have already allowed
£50 million as a margin and, if this is insufficient,
there is also, I believe, a substantial hidden
reserve in my estimate of the voluntary savings
to be expected outside the deferment scheme.)
It would also be reasonable to release them for
the payment of death duties.
In the second place, a man might be allowed to
apply his deferred pay to the purchase of new
life insurance or an endowment pohcy. Schemes
to encourage this might be prepared by the Life
Offices on lines adapted to the special circumstances.
In the third place, since these deposits are a
man’s own property intended to increase his
sense of security and as a reserve against his
family and personal emergencies, he should be
allowed to use his deposit in any case approved
by his friendly society or, in the case of the P.O.
Savings Bank, by a local committee, as for
example to meet illness, unemployment or special
family expenses.
In general, however, the deposits are not
intended to be used until after the war when they
would be released by a series of instalments at
dates, not unduly delayed, to be fixed by the
46 HOW TO PAY FOR THE WAR
Government. Meanwhile they should not reckon
in calculations arising out of the Means Test or
eligibility for old age pensions or the Capital Levy
to be proposed below or the like.
The appropriate time for the ultimate release
of the deposits will have arrived at the onset of the
first post-war slump. For then the present position
will be exactly reversed. Instead of demand being
in excess of supply, we shall have a capacity to
produce in excess of the current demand. Thus the
system of deferment will be twice blessed; and will
do almost as much good hereafter in preventing
deflation and unemplo3anent as it does now in
preventing inflation and the exhaustion of scarce
resources. For it is exceedingly likely that a time
will come after the war when we shall be as anxious
to increase consumers’ demand as we are now to
decrease it. It is only sensible to put off private
expenditure from the date when it cannot be used
to increase consumption to the date when it will
bring into employment resoiirces which otherwise
would run to waste.
If the deposits are released in these circum-
stances, the system will be self-liquidating both
in terms of real resources and of finance. In terms
of real resources it will be self-liquidating because
the consumption will be met out of labour and
productive capacity which would otherwise run to
waste. In terms of finance it will be self-liquidating
because it will avoid the necessity of raising other
loans to pay for unemployment or for public
works and the like as a means of preventing
rmemployment.
deferred pay release and capital levy 47
Nevertheless it has been my experience that no
part of the scheme has raised more doubts than
this supposed difficulty about the ultimate repay-
ment of the blocked deposits. I am surprised at
this criticism which seems to me unreasonable.
For the National Debt will be no greater than if
the same results were produced by voluntary
savings. Moreover the discretion reserved to the
Treasury for the date of release makes it easier to
handle this particular section of the National Debt
than the rest of the large volume of short-term
debt which the war is likely to leave behind it.
The argument is, I suppose, that savings deferred
in this way are more hkeiy than normal savings
to be spent by their owners as soon as they are
free to do so. How far this will prove to be true
in fact, I am not sure. It may be that the blocked
deposits win be instrumental in spreading the habit
of small savings more widely, and that a large
proportion will be left undrawn as conservatively
as the existing Savings Bank deposits. But I am
not relying on this. Indeed, in so far as the
deposits are not spent when the time comes for
their release the advantages to employment which
I have forecast will not matme. I am doing no
more than assume that steps can be taken to
prevent the deposits from being spent faster than
they can be replaced by new loans which would
have been required in any case for the relief or
the avoidance of unemployment.
If, however, public opinion still feels a diffi-
culty here, it is one that can be met in a manner
which has advantages for its own sake. If the
48 HOW TO PAY FOR THE WAR
war continues for two years or longer, the National
Debt will reach an unmanageable figure, which
will hamper national finance for years to come.
In such circumstances a Capital Levy will be
advisable just as (in my opinion) it was at the
end of the last war, if it could have been carried
out before the post-war slump. There may be a
good case, therefore, for linking a Capital Levy
(or tax) to the Deferred Pay.
I suggest, therefore, that an undertaking should
be given that a Capital Levy will be enforced after
the war to bring in an amount sufficient to dis-
charge the liability in respect of Deferred Pay.
I should still argue that it would be better not
to synchronise the two. I would not willingly
forego the great advantages of withholding the
deferred pay until the onset of serious unemploy-
ment, whereas this woxdd be the worst possible
time for the Capital Levy. If the Levy is to be
paid in a lump sum, it should be discharged at
the earliest possible date after the close of the
war, especially if temporary boom conditions seem
imminent. But it might be preferable, as facilitat-
ing coUeotion and greatly lessening the disturb-
ance, to collect it in a series of instalments over
a period. This procedure would have the special
merit that it might pave the way administratively
for a permanent capital tax which would be a
valuable addition to our fiscal machinery and has
certain important advantages over income tax.
In any case there will be plenty of Treasury Bills
after the war waiting to be cared for, so that
there is no technical reason why the Capital Levy
DEFERRED PAY RELEASE AND CAPITAL LEVY 49
and tlie release of the blocked deposits need be
simultaneous.
It is often argued in labour circles that a Capital
Levy should form part of the immediate pro-
gramme for the finance of the war. The sound
reasons which lie behind this, namely that the
war should be an occasion for diminishing rather
than for increasing the existing inequalities of
wealth, are completely met by the above pro-
posal. At the same time, the great and indeed
overwhelming objections to an immediate war-
time levy are avoided. I am not thinking mainly
of the administrative difl&culties, though these
might prove insuperable. The main point is that
a Capital Levy now would do little or nothing to
solve the immediate problem. A Capital Levy on
a scale worth having could not be met out of
the current consumption of the wealthy. They
could only pay it by handing over assets to the
Government, ^e capital value of which would be
of no assistance whatever to the immediate finan-
cial task. Nothing is of the least use now which
does not diTninisb consumption out of current
income; and for the reasons which I have given
in Chapter IV no expedient can be adequate which
allows the increased purchasing power of the lower
income groups to materialise in a corresponding
increase in their consumption. There is no avoiding
a postponement of expenditure on the part of this
group, except by inflation which allows them to
spend and deprives them of the fruit of spending.
But the proposal here made secures them the
ultimate enjoyment of their earnings unabated.
50
HOW TO PAY FOR THE WAR
When general principles have been established
for the management of blocked deposits, there
may be other good opportunities for the use of
this device. In particular, men on active service
might have their economic position made a little
more equal to the position of those remaining
in civilian emplojrment by being credited vdth
an appropriate blocked deposit proportional to
their length of service. A “veteran’s bonus” is
a peculiarly fit obligation for discharge by a
capital levy on wealth.
The device might also be useful for dealing
with excess profits. A counsel of perfection would
require that no excess profits should be allowed
during the war. This is not advisable in practice
because it would deprive those, who would never-
theless remain in control of their businesses, of
any incentive towards economy; and the experi-
ence of the last war showed that this is liable to
lead to great extravagance and waste. It is in
the interest of the Treasury that the gross figure
of excess profits before deduction of tax should
be as large as possible; and this will not be
attained if those in charge of business are de-
prived of all incentive. The existing tax on
excess profits is at the rate of 60 per cent which
means that, including income tax, 76 per cent
already accrues to the Treasury and even a
larger percentage in the case of surtax payers.
If the basis of calculation was rendered more
equitable so that what legally reckons as excess
profits really are so in fact, there would be room
for a moderate increase. But it might be a
DEFERRED PAY RELEASE AND CAPITAL LEVY 51
better plan to require the balance of excess
profits after deducting E.P.T. and income-tax to
be held in a blocked deposit.
CHAPTER Vin
RATIONING PRICE CONTROL
AND WAGE CONTROL
The mechanism of reaching equilibrium by means
of a rising cost of living, which is vainly pursued
by a rising level of wages, will be described in the
next chapter. But it is admitted on all hands
that this is the worst possible solution.
It has been argued here that the only way to
escape from this is to withdraw from the market,
either by taxation or by deferment, an adequate
proportion of consumers’ purchasing power, so
that there is no longer an irresistible force impel-
ling prices upwards. But there are many who
believe that there is another alternative open,
namely to control the cost of living by a combina-
tion of rationing and price fixing, and that, if
this was done, wage control would become
manageable.
I believe that it is a dangerous delusion to
suppose that equilibrium can be reached by these
measures alone. Nevertheless some measure of
rationing and price control should play a part in
our general scheme and might be a valuable
adjunct to our main proposal. It is relevant,
therefore, to debate the matter in this place.
52
HOW TO PAY FOR THE WAR
There are two central objections to rationing
and price control unaccompanied by a with-
drawal of consumers’ purchasing power. The first
objection arises out of the great variety of per-
sonal consumption between one man and another.
If our needs and tastes were aU the same, there
would be no real loss in abolishing consumers’
choice. In fact there is a great deal of waste,
both of resources and of enjoyment, in aUotting
to each of us identical rations of every consumable
object. There are some articles of consumption —
bread, sugar, salt, bacon perhaps — ^where no great
harm is done, though even here there are in fact
wide difiFerences of personal habit. But as one
proceeds through the list — milk, coffee, beer,
spirits, butcher’s meat, clothing, boots, books,
articles of clothing, fiimiture — ^the variety of
taste and need dominates the scene. It becomes
ludicrous to compel everyone to divide his expen-
diture between the different articles of expendi-
ture in exactly the same way. Moreover, it would
never be practicable to cover every conceivable
article by a rationing coupon; and if there are
certain articles uncontrolled the pressure of pur-
chasing power win tend to divert production in
their Section, although they may be what the
consumer least wants and what it is least desir-
able that he should have. Finally, if by a miracle
the method was substantially successful, so that
consumption was completely controlled and con-
sumers were left with a significant fraction of
their incomes which they were unable to spend,
we should merely have arrived by an elaborate.
RATIONING, PRICE AND WAGE CONTROL S3
roundabout and wasteful method at the gnirie
result as if that fraction of their incomes had been
deferred from the outset.
If our object is to prevent a certain proportion
of consumers’ incomes from being spent, the only
sensible thing is to start at that end, withholding
by deferment or by taxation that proportion
which is not to be spent and then allowing a free
choice to the consumer how he shall divide what
he is allowed to spend between different articles
of consumption. A world of trouble and an ocean
of waste win be avoided, and the consumer wiU
enjoy far more satisfaction. A recent cartoon by
Low, in which Sir John Simon was depicted
struggling with a belt unable to decide whether
he should constrict “ the pantry or the pocket ”,
conveyed profound comment on this matter.
Constriction of the pocket is the alternative which
a free community should prefer. The abolition
of consumer’s choice in favour of universal ration-
ing is a typical product of that onslaught, some-
times called bolshevism, on differences between one
man and another by which existence is enriched.
A well-conceived policy of rationing has quite
a different object from this. Its purpose is not to
control aggregate consumption but to divert con-
sumption in as fair a way as possible from an
article, the supply of which has to be restricted
for special reasons. For example, interruption of
trade with Denmark and the Baltic necessarily
restricts the supply of bacon below normal, and
replacement is only possible by purchases in
U.S.A. which would compete with more important
54 HOW TO PAY FOR THE WAR
claims on our dollar resources ; or it is impossible
to allot enough shipping tonnage to satisfy the
current demand for sugar. It is necessary, there-
fore, to force people to consume less bacon or
less sugar and to buy something else instead; —
quite a different problem from reducing their
aggregate expenditure. If the article is not a
conventional necessary or one of general consump-
tion, the end is reached most easily by allowing
a rise in the price of the article, the consumption
of which we wish to restrict, relatively to other
articles. But if this article is a necessary, an
exceptional rise in the price of which is unde-
sirable, so that the natural method of restriction
is ruled out, then there is a sound case for
rationing.
There is hardly less objection to price fixing
and legal restrictions against price increases,
unaccompanied by any restriction on the volume
of purchasing power. For this policy has the
effect of positively increasing the pressure of con-
sumption and of facilitating the conversion of
money income into the use and depletion of
valuable resources. If the quantity of resources
which the authorities are prepared to release for
civilian consumption is strictly limited, price
fix-ing practices are likely to end in shortages in
the shops and queues of unsatisfied purchasers.
It is, however, imdoubtedly the fact that price
fixing and propaganda against price raising are
much more d la vnode to-day than old-fashioned
inflation. The political advantages of this pohcy
are obvious. The objection to it is that, unlike
RATIONING, PRICE AND WAGE CONTROL 55
old-fashioned inflation, it does nothing to bring
about equilibrium, indeed on the contrary. My
belief is that, if in the next six months no
adequate steps are taken to curtail consumers’
purchasing power, the consequences are much
more likely to he seen in the shape of shortages in
the shops than in a runaway price level. There
is a strong feeling both amongst the public and
amongst producers and retailers against rising
prices. The mentality which used to result for-
merly in rapid price inflation is replaced to-day
by a different conception both of private advan-
tage and of public spirit. I believe, therefore,
that a typical price inflation is much further off
than some people are thinking. I welcome this
new attitude. For it means that we have a longer
time in which to implement a policy of genuine
equilibrium before irremediable damage is done.
Nevertheless it is no genuine solution. Shop
shortages and queues lead to great injustices of
distribution, to an abominable waste of time and
to a needless fraying of the public temper. It is
the alternative which both Russia and Germany
have long preferred to old-fashioned inflation,
and it is, as I have said, d la rmie. But it is for
us to find the third alternative, which is the
genuine solution, preserving both the general
interest and the free choice of the individual
consumer.
I have not attempted to deal directly with the
problem of wages. It is wiser, I expect, to deal
with it indirectly. If the necessary proportion
of consumers’ purchasing power is not withdrawn
56 HOW TO PAY FOR THE WAR
from the market, a significant rise in prices cannot
be avoided, even though there is no runaway
inflation. An attempt on the part of the Govern-
ment to keep down the price level of a range of
articles in general consumption will require,
sooner or later, subsidies on a scale which would
impair stiU further the equilibrium of the budget.
(The Qiancellor of the Exchequer stated recently
that the tentative moves in this direction already
made are costing the Treasury £1,000,000 a week).
And a significant rise in the cost of living is certain
to be followed by a more or less successful agita-
tion for higher wages.
If, on the other hand, the problem is tackled
indirectly by withdrawing purchasing power, there
will be no reason why the vicious process should
be started by prices being forced up at the demand
end. There might be certain subsidies in part
compensation for price increases due to the higher
cost of imports and some rise of wages for grades
of labour which already had a special claim
for an improvement. But the main reason for
the development of an acute wages problem
would have been removed, and we could safely
leave the sequel to the common-sense and public
spirit of trade unionists as to what is or is not
reasonable in time of war.
Nevertheless, if a scheme for deferment of pay
is adopted, this would make practicable a farther
measure which might considerably ease the wages
problem. For with an adequate proportion of
consumers’ purchasing power withdrawn, the risk
and expense of a deliberate policy to keep down
RATIONING, PRICE AND WAGE CONTROL 57
the prices of a limited range of necessities might
be no longer prohibitive. I suggest, therefore,
(contingently on the adoption of a scheme for
deferment of pay) that a limited range of essentials,
considerably narrower than the list covered by
the Ministry of Labour Index Number for the
cost of living, should be drawn up and that the
Government (without giving any specific pledge)
should do their best to prevent any rise in an
index number based on the cost of these articles ;
and that on their side the Trade Unions (also
without giving any specific pledge) should agree
that they will not press for any wage increases
on the grounds of the cost of living, except in so
far as the Government may be unsuccessfnl in
keeping the above index number from rising.
This suggestion is in no way essential to our main
proposals, but is a further development which
these proposals would facilitate.
OHAPTBB IX
VOLUNTARY SAVING AND THE MECHANISM
OF INFLATION
These exist alternative to the plan proposed in
the previous ‘chapters which are not less drastic
and, if they were to be put into operation, not less
effective. For example, a retail sales-tax of 50 per
cent or a wages-tax of 20 per cent ; or, as I have
pointed out above, a heavier income tax, the
increased incidence of which was exactly the same
E
68 HOW TO PAY POE. THE WAR
as that of the deferment of pay here proposed.
The choice between these drastic and equally
effective alternatives must be decided on con-
siderations of pubhc psychology, social justice and
administrative convenience.
Those, however, who are opposed to a scheme
for deferred pay, do not, as a rule, oppose it
because they prefer one of the drastic alternatives,
but because they believe that we can win through
by “normal” methods, that is to say by stiff
taxation on existing lines and by voluntary
savings stimulated by active propaganda.
Now this pohcy might mean either of two
things. It might mean a repetition mutatis
mutandis of our policy in the last war, namely
a sufficient degree of inflation to raise the yield
of taxes and voluntary savings to the required
level. The mechanism of this process is the main
subject of this chapter.
But it might also mean — and that is what its
advocates would claim for it — something much
better than this, namely an equilibrium between
supply and demand without any aid from an
inflation.
The practicability of so happy an outcome is
clearly a question of degree. Bor example, if the
increase in the expenditure of the Treasury, com-
pared with the &ancial year 1938-39, was no
more than £1,000 million, or perhaps £1,250
million, we might reasonably expect “normal”
methods to be adequate {supplemented, of course,
by drawing on the availahle capital resources).
If, on the other hand, the increase in expenditure
60 HOW TO PAY FOR THE WAR
voluntary savings added together, since the higher
tax will not be met entirely by a reduction in
consumption but partly at least by a reduction
in savings.
Thus, as soon as the rate of expenditme has
exceeded the maximum which can be handled by
normal methods, our drastic methods must be
sufficient to produce a yield greater than this
excess, since we can no longer rely on the same
yield as before from voluntary sources. For this
reason I have put no reliance above on voluntary
savings by private individuals as distinct from
institutional and contractual saving, though I
hope that this may prove unduly pessimistic.
I should mention in passing, what is obvious,
that the excellent success of the War Savings
Campaign gives no useful statistical guide to the
prospects of the voluntary method. The terms
offered, being attractive compared with the deposit
rates of the Post Office Savings Bank and the
Joint Stock Banks, naturally attract old savings
previously held elsewhere. Moreover, the forma-
tion of savings groups is frequently assisted by
advances from employers for the purchase of
certificates to be .paid for gradually by future
deductions from earnings. Thus the published
totals comprehend both past and future savings,
and it is impossible to say what proportion of
them is attributable to cmrent savings in the
sense of an excess of current income over current
expenditure during the period in which the
nominal total has been subscribed.
The force of this general argument appears to
VOLUNTARY SAVING 61
me to be such as to make it very unlikely that
we can achieve our maximum war effort by
“normal” methods of taxation on existing lines
supplemented by voluntary saving. The danger
of depending on voluntary savings lies in the fact
that, if we adopt no drastic method, we are liable
to slip insensibly into stimulating voluntary
savings by inflation. And that leads us to the
main theme of this chapter.
There is no difficulty whatever in paying for
the cost of the war out of voluntary savings; —
provided we put up with the consequences. That
is where the danger lies. A Government, which
has control of the banking and cmrency system,
can always find the cash to pay for its purchases
of home-produced goods. After allowing for the
yield of taxation and for the use of foreign reserves
to pay for the excess of imports over exports, the
balance of the Government’s expenditure neces-
sarily remains in the hands of the public in the
shape of voluntary savings. That is an arith-
metical certainty; for the Government having
taken the goods, out of which a proportion of
the income of the public has been earned, there
is nothing on which this proportion of income can
be spent. If prices go up, the extra receipts swell
someone’s income, so that there is just as much
left over as before. This argument is of such
importance and so little understood that it is
worth our while to follow it out in detail.
Let us suppose that the value of the outpfut^
^ I am taking round figures in the neighbourhood of the facto. BbI
1 sunphfy the illustration by ignoring the depletion of capitol ofi
source to meet govermnent expenditure. . <
62 HOW TO PAY FOR THE WAR
of the country is £5,500 million at pre-war prices,
that individual incomes (including transfer pay-
ments) come to £6,000 million, that the yield of
taxation is £1,400 million, that we supplement
our own output by importing £350 milli on more
than we export paid for out of foreign reserves or
overseas loans, and that the expenditure of the
Government, also reckoned at pre-war prices, is
£2,750 million, i.e. £2,250 million excludi^ trans-
fer payments. After deducting £1,400 million
which they pay in taxation, individuals are left
with £4,600 million which they are free to spend
if they choose. But, since the Government has
already purchased £2,250 million of the output,
there is only £3,250 (£5,500— £2,250) million of
goods (valued at pre-war prices) left for the
public to buy with their remaining incomes of
£4,600 million. Now if the public voluntarily
save £1,350 million, that is to say the whole of the
difference between their incomes of £4,600 million
and the value of the available goods, namely,
£3,250, at pre-war prices, obviously the problem
is solved. There will be just the right amount of
goods available to satisfy the demand without any
rise of prices.
But, if in these circumstances, the public do
not choose to save so much as £1,350 million, does
the system of financing the war by voluntary
savings break down? Certainly not. For in the
last war we used the voluntary system success-
fully; yet, since prices rose more steeply than
wages, it follows ifrat the readiness of the public
to save cannot have been sufS.cient to satisfy
VOLUNTARY SAVING 63
the above conditions. What happens then? How
is the paradox explained?
Let us suppose that, instead of saving the neces-
sary £1,350 million, the voluntary savings of the
public are, in the first instance, only £700 million,
and that they tiy to spend the rest of their
incomes, namely £3,900 million, on goods worth
only £3,250 million at pre-war prices. Obviously
prices will have to rise 20 per cent which will
equate supply and demand; for the goods wfil
then be worth £3,900 (£3,250 -f £650) million, which
is just equal to the desired expenditure. More-
over, those who have sold for £3,900 million goods
which only coat them £3,250 million will have the
balance of £650 million left over as extra unspent
income, just the amoirnt the Gtovemment requires.
It soon appears, however, that this only solves
the problem momentarily. For we have no reason
to expect that the whole of the unspent windfall
profits of £650 million will represent permanent
savings. A certain time will elapse before this sum
reaches those who will be entitled to spend it.
But in the next innings, so to speak, it will be
added to the total of potentially spendable /
incomes, so that we shall have incomes of £5,250
million (£4,600-|-£650) facing goods which, after
allowing for the continuance of the 20 per cent
price rise, are only worth £3,900 million. More-
over, it will be impossible for the Government to
keep down the prices of its own purchases if open
market prices have risen 20 per cent. Thus we
shall soon find ourselves in much the same position
as before with a substantial discrepancy between
64 HOW TO PAY. FOR THE WAR
the amoimt of money which the public are pre-
paring to spend and the value (at the new price
level, 20 per cent higher than before) of the
goods available for them to buy. A further rise
in prices will be required to provide a temporary
respite; and so on.
Fortunately this is not a complete picture of
the second chapter of the story. If it were, the
voluntary savings system would not have been
successfid, and we should be faced with a pro-
gressive inflation of prices without limit . Yet
this is not what happened in the last war. And
it is not likely to happen this time, even if we
pursue the same policy of depending on voluntary
savings.
What, then, is the actual course of events?
The initial rise in prices will relate to goods which
were produced at the lower pre-war price level,
and the resialting profits will belong, as we have
seen, to the owners of these goods. That is to
say, aggregate incomes wfll indeed rise by £650
million (apart from the effect of any rise in the
price of goods bought by the Government), but
not everyone’s income will rise in the same pro-
portion, if at all. The initial increase of income
wfll mainly belong to a Ihnited class of individuals
and of trading and manufacturing companies,
whom (without intending any insult, for it is by
no fault or intention of theirs) we can call for
short “the profiteers.” Now the profiteers are
liable to a very high rate of taxation, both on
account of Excess Profits Tax and because many
of them wfll be rich enough to be hable to a high
VOLUNTARY SAVING 65
rate of income tax and surtax. Thus the profiteers
become, so to speak, tax-collectors for, the Treasury.
More than half (more than three-quarters in some
cases)^ of the £650 million Trill become payable
as taxes. Moreover it is likely that a considerable
proportion of the balance Trill be voluntarily
saved; not so much because the recipients, being
relatively rich, TriU save more readily, but because
the profits TriU largely belong to companies vrhich
TriU be disinclined, for various reasons, to dis-
tribute the bulk of them in higher dividends but
TriU prefer in the circumstances to save them on
behalf of their shareholders. Thus, in fact, only
a smaU part of the £650 miUion (or of this figure
augmented by such higher prices as the Govern-
ment may pay for its otto purposes) TriU come
on the consumption market in the second innings.
Instead of another 20 per cent rise of prices being
required to preserve equilibrium, it may be that
a rise of 2 or 3 per cent T^ould be sufficient. In
this case a modest increase of taxation on the
general pubUc TriU be sufficient to offset the
increased consumption of the profiteers, and avoid
the necessity (if it T^ere not for ivhat foUov^s in
a moment) for any further rise of prices beyond
the initial 20 per cent.
Unfortunately this is not yet the complete
story ; for T^e have noTV^ gone to the other extreme,
having sUpped in an assumption much less
troublesome than the facts. We have assumed
that, in spite of the rise of 20 per cent in prices,
* E.P.T.-(-Ineoine Tax ia 76 per cent, and B.P.T.-|-Inooine Tax+
Surtax on incomes of £6,000 is 83.6 per cent of the increased income.
66 HOW TO PAY FOR THE WAR
workers are content with the same money-wages
as before ; so that the profiteers continue to make
a profit of £660 million in tbe second innings and
to act as tax-coUectors for the Treasury on the
same scale as before without the aid of any
further rise in prices. But in fact the workers
will press for higher wages, — with at least partial
success. For employers will put up much less
resistance than usual to a rise in wages. The
scarcity of labour will force them to agree if they
are to retain their men; and, since the Govern-
ment is taking away in taxation 75 per cent of
their excess profits, it will not cost them much
to share their profiteering with their employees
and their salaried Ataff. If, indeed, wages and
other money costs" were to go up fuUy in pro-
portion to the cost of living, we should be faced,
as before, with an unlimited inflation, proceeding
by 20 per cent at each step, — ^the process generally
hnown as the vicious spiral.
But we still have one more card to play. Some
costs are fixed by law or by contract, so that the
r&ntier and pensioner class who have fixed money-
incomes cannot escape the sacrifice. Wage adjust-
ments and the like take time. It takes time, and
sometimes a considerable time, before adjustments
are made even when the pressure is sufficient to
make them inevitable sooner or later. It is these
time-lags and other impediments which come to
the rescue. Wars do not last for ever. Wages and
other costs wiU chase prices upwards, but never-
theless prices will always (on the above assump-
tions) keep 20 per cent ahead. However much
VOLUNTARY SAVING 67
wages are increased, the act of spending these
wages will always push prices this much in
advance. If at the end of sis months wages and
other costs have risen by an average of 10 per
cent, prices will have risen 32 per cent (120 per
cent of 110). If at the end of two years costs
have risen 40 per cent, prices will have risen 68
'per cent (120 per cent of 140). Thus, after aU,
the system of voluntary savings will have worked
successfully. That is to say, the money will have
been raised “voluntarily” without an unlimited
increase of prices. The only condition for its
success is that prices should rise relatively to
wages to the extent necessary to divert the right
amount of working class and other incomes into
the hands of the profiteers and thence into the
hands of the Treasury, largely in the form of
taxes and partly in the form of extra voluntary
savings by the profiteers.
The larger the amount of voluntary savings
at each stage, the better, of course, it will be for
everyone. If the campaign of the National Saviijgs
Movement increases the volume of voluntary
savings, the necessary rise in prices relatively to
wages will be correspondingly smaller. Let us
go back to our arithmetical illustration. We
started with an excess of spendable incomes, over
the available supply of consumption goods valued
at pre-war prices, amounting to £1,350 million
and we assumed that £700 million of this was
voluntarily saved. This left £650 milli on, or 20 per
cent more than the available supply of goods
at pre-war prices. But if the National Savings
68 HOW TO PAY FOR THE WAR
Movement were to be successful in increasing tbe
amount of the voluntary savings by (say) another
£100 million, making £800 million altogether
instead of £700 million, then the excess of spend-
able incomes is reduced to £550 million or about
17 per cent above the available supply at pre-
war prices. In this case we can reach equilibrium
with a rise in prices only 17 per cent (instead of
20 per cent) in excess of the rise in wages and
other costs.
Thus an increase in voluntary savings is entirely
beneficial. There is nothing to be said against it,
except its inadequacy. The question for the indi-
vidual is whether he would prefer to become £2
richer by deferment of pay, and have no inflation
of prices or become £1 richer by voluntary savings,
and suffer inflation with its evil social consequences.
For the individual (unless he belongs to the profit-
making class) the answer is surely obvious. He is
certain to gain by the system of deferment. It
is like asking him whether he would prefer to
have a compulsory nde of the road with few
accidents and no traffic congestion, or a volun-
tary rule with many accidents and much traffic
congestion.
For the Treasury and for future taxpayers
the answer is not so obvious. A system of de-
ferment of pay — ^and equally, a system of highly
successful voluntary savings — ^will leave us with
a larger national debt measured in terms of real
value, than if we adopt the method of imper-
fectly successful voluntary savings supplemented
by inflation. For inflation is a mighty tax-gatherer.
VOLUNTAHY SAVING 69
But the Treasury and the tax-payer of the future
need only remain in doubt if they expect the
price-level reached by inflation to continue per-
manently. For the national debt under the
inflationary system is likely to bo larger in terms
of money than under the system of compulsory
savings; so that if prices subsequently fall back,
the benefits of inflation ■will have proved illusory
even to the Treasury.
Thus it is quite true that, in the last resort,
the amount of saving, necessary to balance the
expenditure of the Government after aflo'wing
for the yield of taxation, can always be obtained
by “voluntary” savings. But whether this is a
good name for it is a matter of taste. It is a
method of compulsorily converting the appro-
priate part of the earnings of the worker which
lie does not save voluntarily into the voluntary
savings (and taxation) of the entrepreneur. “ We
shall depend on the voluntary system” is another
way of saying “We shall depend on inflation to
the exten't that is necessary.” Sir Robert Kin-
dersley in hie Sa-yings Campaign could justly
argue as follows:
“ The Government needs the money. But
this is a free country. Someone, therefore, must
save it voluntarily. If you (and your Mends)
do not do so, the necessary amount •wiU be taken
compulsorily from the real value of your
earnings through the action of higher prices
and handed to the profiteer; and lie will save
it voluntarily (such part as he does not pay m
compulsory taxes). In this way we shall avoid
70
HOW TO PAY POR THE WAR
any departure, whicli would be anathema to
the city, from the voluntary system.”
Ambiguous though this may be, as a defence of
the principles of liberty, it would be a sound and
convincing argument to the worker in favour of
increased saving if it were not for one flaw. An
individual cannot by saving more protect himself
from the consequences of inflation if others do not
follow his example; just as he cannot protect
himself from accidents by obeying the rule of
the road if others disregard it. We have here the
perfect opportunity for social action, where every-
one can be protected by making a certain rule of
behaviour universal.
This analysis of how inflation works is funda-
mental. And it is fairly simple. But it is not yet
understood by everyone, — ^for the reason, sur-
prising perhaps, that it is comparatively novel.
Economists have only got clear about it (although
it is a case much simpler than what happens in
peace-time, when, instead of a fixed maximum
output, we have to allow for the effect of fluctua-
tions in employment) in the last quarter of a
century, since, that is to say, those now in
authority acquired their dogmas. During the last
war I was in the Treasury. But I never at that
time heard our financial problem discussed along
these fines.
It will be interesting, therefore, to throw our
minds back and consider, in the light of this
analysis, what happened on that occasion.
VOLTJNTAEY SAVING
Money Wage Boies
Cost of Living
BecA Wage Boies
July
Rough average of
per cent increase
in the wages of
the workers men-
tioned below^
Labour Modified
Gazette Index^
Index
According to :
Labour Modified
Gazette Index
1914
100
100
100
100
100
1916
105-110
125
(120)
84-88
87-92
1916
11&-120
145
(136)
79-83
85-89
1917
135-140
180
(160)
76-88
84-88
1918
176-180
205
180
86-88
97-100
Thus, the Labour Gazette index of the cost of
living rose by 26 points a year and the modified
index (compiled in 1918) by 20 points a year,
with the truth probably lying between the two;
and by the end of the war the value of money
was about halved. As against this, money wage
rates rose on the average about 10 points a year
during the first half of the war and about 30
points a year during the second half. The net
result was that the purchasing power of wage-
rates during the first three years of the war up
to July 1917 ranged about 15 per cent less than
before the war. The considerable recovery shown
in the last year and a half of the war was made
possible by the relaxation of financial pressure
due to the entry of the United States, but the
extent of it is difdcult to calculate accurately on
^ Bricklayers, Bricklayeic’ labourers, Compositors, Railwaymen,
Dock labotirers. Cotton operatives. Woollen _ and worsted operatives.
Engineering artisana. Engineering labourers. Ship-building platers’
time rates. Cool mining. Agriculture England and Wales.
* The ModiSed Index is based on the findings of the Sumner Com-
mittee in 1918. The chief differences from the ofiiciol index ariee_ with
respect to clothing, sugar, butter, margarine. The Sumner index
allows for substitution when the pre-war qualities were not obtainable
on the market. The official index does not.
72 HOW TO PAY FOR THE WAR
account of the statistical deceptions arising out
of the change of system and of the diversion of
consumption after the introduction of strict
rationing and fixed prices.
The above analysis teUs us how to interpret
these results. The volume of spendable earnings
(which increased more rapidly than wage-rates
owing to better emplojnnent, overtime etc.) in-
creased 15 per cent relatively to the supply of
consumption goods (rather less than this at first
and rather more eventually), as is indicated by
the 15 per cent rise in prices relatively to wages.
This rise in the cost of living provoked a corres-
ponding rise in wage-rates with a time-lag of
almost exactly a year and was off-set simul-
taneously by an equal further rise in prices. In
each year wages rose almost exactly to the price-
level of the previous year. Thus the time-lag was
just long enough to prevent disaster. If prices
have to keep 15 per cent above wages and if
wages rise half this amoimt in the first year and
then foUow prices with a time-lag of a year, we
can get through four years of war by a little
less than a doubling of prices. How closely this
rule of thumb corresponded with the facts is
shown in the following table: —
Theoretical rate of rise Adval rate^
Wage Bates Prices Wa^eBates Prices
1914
100
100
100
100
1915
107i
122J
107^
122|
1916
122i
141
117J
140
1917
141
161
137J
170
1918
161
186i
mi
192i
^ Average of the two estimates.
VOLUNTARY SAVING 73
But what a ridiculous system with wages and
prices chasing one another upwards in this man-
ner! No one benefited except the profiteer. The
seeds of much subsequent trouble were sown.
And we ended up with a National Debt vastly
greater in terms of money than was necessary
and very ill distributed through the community.
Compare this with a system of deferment of pay.
A levy averaging 15 per cent would have allowed
the same relationship as before between money
wage-rates and the cost of living; so that the
pressure of the former to chase the latter upwards
would have been withdrawn. The real consump-
tion of the working-classes would have remained
in the aggregate exactly the same as under the
inflationary system. If average earnings at the
old wage-rates were 16 per cent higher than
before on account of fuller employment and over-
time (which is approximately what happened in
fact), the working class standard of consumption
would have been maintained at the pre-war level
without any sacrifice except the harder work
accomplished. This harder work would have been
recompensed by the workers becoming the owners
of a significant proportion of the National Debt.
For at the end of the war (to take very conser-
vative figures) the money total of the National
Debt would have been reduced by more than
£2,000 million, and of this reduced total more
than £500 million would have belonged to wage
and salary earners instead of to the profiteers.
That is to say, dependence on the method of
“voluntary” savings in the last war put some
74 HOW TO PAY FOR THE WAR
£2,500 million into the pockets of the entre-
preneur class.
In the last war we achieved the miracle of
maintaining aggregate working-class consumption
at, or near, its pre-war level, — ^the fall in real
wage-rates being offset by increased employment
and hours worked. I am not yet convinced that
we may not achieve the same result this time.
Until the full economic demands of the war have
been disclosed, one cannot teU. But if aggregate
earnings at the existing wage-rates increase be-
cause of overtime and full employment, a rise in
basic wage-rates sufficient to compensate for
higher prices would set our national economy the
impossible task of raising consumption above the
pre-war level. We cannot reward the worker in
this way, and an attempt to do so will merely
set in motion the inflationary process. But we
can reward him by giving him a share in the
claims on the future which would belong other-
wise to the entrepreneurs.
OHAPTBB X
- THE SYSTEM ADOPTED IN FRANCE
It is worth pointing out that the proposals of
this pamphlet are exceedingly mild (and may well
prove much milder than we can afford) compared
with the measures adopted in either of the other
two belligerent countries, enemy and allied.
In Germany there have been rumours of the
THE SYSTEM ADOPTED IN FRANCE 75
adoption of a system of, deferred pay which
would bear a sup^cial resemblance to the above.
But if these reports are correct, this measure
would be on the top of other measures already
taken which are far more drastic than anything,
suggested here, — a complete fixation of wages,
hours and prices, a comprehensive system of
rationing supplemented by shop shortages and
prohibitions of every kind, and a series of deduc-
tions from wages, quite apart from any system
of deferred pay, which already add up to a for-
midable total several times heavier than the scale
of deferred pay proposed above for the lower
group of incomes. I wish I was in a position to
give more exact, quantitative particulars. But I
should guess that if we were to enforce in this
country a control of general consumption as
drastic as that which is already in force in
Germany, we should be in a position to increase
our war effort by fuHy 60 per cent and perhaps
substantially more. We shall, therefore, reject at
our peril initial measures at least on the scale
here recommended, or their equivalent.
Since the German system in its entirety is
that which it is our object to avoid even as a
temporary measure by any means short of jeopard-
ising ultimate victory, it may be more to the point
to quote the measures which have been adopted
in France. For reasons which are not entirely
due to the censorship a veil seems to separate
us from what is happening in France almost
thicker than that which divides us from the
enemy. British public opinion is, I believe, almost
76 HOW TO PAY FOR THE WAR
completely xmaware how far-reaching is the
French control over wages and the conditions
of labour.
By a series of official decrees culminating in
that of November 16, 1939, a complete official
control has been established over wages and the
conditions of labour, more far-reaching in the
munition industries and less so in the others. In
the non-munition industries wages must not be
changed from their pre-war level by collective
agreement or otherwise without the approval of
the Minister of Labour. In the munition indus-
tries wages are fixed by the Minister of Labom
and the Minister of Munitions (or other service
department) ; employers are prohibited from pay-
ing wages in excess of a stipulated maximum (in
general the pre-war level); employees may not
leave their present employment without permis-
sion and may be moved by the authorities at
will. Thus any tendency towards a rising wage
level has been legally inhibited at the out-
set.
In addition to this a fund has been established
called the National Solidarity Bund out of which
wUl be met any special expenditure in the civilian
sphere due to the war, including, I think, any
losses arising out of official measures to keep down
the cost of living. Into this Bund there wUl be
paid the proceeds of an excess profits tax and a
general levy on wages. The levy on wages consists
of:
(a) 15 per cent of the wages of workers who are
liable to military service, but have been exempted
77
THE SYSTEM ADOPTED IN FRANCE
because, as we should express it, they are in a
reserved occupation;
(b) the whole of the earnings both of these and
of aU other workers in respect of their work
between 40 and 45 hours a week, and one third
of their earnings in respect of hours worked above
45 a week. (In the numerous cases where the hours
of work are now 50 a week or more, tin's works
out at almost another 15 per cent).
Against this there are rigorous measures to
maintain the cost of living at the pre-war level,
but, so far, rationing has been avoided. I have
no particulars how this is working out in practice
or whether it is involving the French Treasury
in expensive subsidies in the case of imported or
agricultural goods.
This account is imperfect and perhaps inaccuxate
as an up-to-date statement. I hope that its pub-
lication may stimulate a Frenchman into giving
us a fuller account of the French home front
than I have found readily available at present.
In a talk to the French nation over the wireless
at the end of January, 1940, M. Daladier com-
mended these stem measures to the civilian
population and urged their willing acceptance of
them in the following terms: —
“When they left for the frontier, our sons
accepted a total transformation of their lives.
Those who have stayed behind and do not have
to put up with the same sufferings and dangers
must also agree to transform their lives. They
must sacrifice their personal interests, renounce
certain commodities. Above aU, they must con-
78 HOW TO PAY FOE THE WAE
centrate all their strength and activity in the
service of the IVench community without which
they would be nothing. It would be vain and even
ciimxaal to conceal the fact that Germany’s
material power is one of the most formidable in
the world. The issue at stake is not merely the
existence of the nation, but our whole conception
of hfe. . . . To-day it is to the Erance behind
the lines that I wish to speak. I wish to speak
to it with candour and even brutality. ... It
is essential, in a word, that those of the interior
succeed in making themselves respected by those
at the front through work, renunciation and
discipline.” And in conclusion he summed up
German propaganda which speaks like Satan, as
follows: “It says to the wealthy, ‘You are going
to lose your money. ’ It says to the worker, ‘This
war is the war of the wealthy.’ It says to the
intellectual and the artist, ‘All that you love is
threatened by destruction.’ It says to him who
loves the goods of this world, ‘A few months more
and you will have to accept painful restriction’.
It says to the believer, ‘How can your faith accept
this massacre?’ Finally it says to the adventurer,
* A man like you can make something out of your
country’s misfortunes.’”
It is well to conclude this pamphlet with these
eloquent words of the leader of a nation at war —
even if it makes the careful humanitarian argu-
ments and apologetically mild proposals of the
previous pages sound pitiful and weak.
APPENDIX I
THE 'SA.TiaSAI, IHOOME
The ^^discrepancies between Tarious current estimates of
National income are more largely due to different ideas of the
meaning of this concept than to strictly statistical differences,
— ^uncertain though many of the underlying statistical estimates
may be. The following note accepts 1^. Colin Clark’s statistics,
but not his concept of gross national income, without attempt-
ing to go behind them or to criticise them. The actual figures
given are Mr. Clark’s brought up to date where necessary
by Mr. Bothbarth for the financial year April 1, 1938-
March 31, 1939 in terms of the prices of that year.
There are two fundamental concepts which are serviceable
for general use. The first is the total current output measured
in terms of money cost, already given in the test, namely:
£ million
3,710 current value of private consumption excluding in-
direct taxation but including the cost of making
good current depredation ;
290 current cost of net new investment in buildings,
plant, transport and stocks, t.e., current capital
outlay in excess of what is required to make good
current capital depreciation ;
850 current cost of Government operations excluding
“transfer” payments to pensioners, holders of
national debt, etc., expenditure out of which is
already included in the previous items.
4,850
I propose to call this the National Output.
The second concept is that of Taxable Income, namely the
aggregate of individual incomes (including charities, private
institutions and companies). It differs fcom the above in
that it includes “transfer” incomes of £500 million and excludes
Government non-tax income of £50 million from trading
profits. It follows that its amount is £5,300 (£4,850-f£500
— £50) million. It can also be broken down into the following
constituents
79
80
APPENDIX
. . £ mUlim
Pnvate consumption at market prices (made up
of indirect taxes and rates £670 million and
current value £3,710 million including current
depreciation as above)
Private saving (made up of £290 million new in-
vestment as above and £80 million lent to the
Government to cover the excess of the cost of
Government operations over revenue from taxes
and trading profits) 370
Direot taxes 650
'pOQ i
It may be useful to add a list of the principal elements
out of which these or other concepts of income can be built up.
Government Income and OvUay (Central and local) ^
Government Income : Direct Taxes . . . 650
Indirect Taxes . . . 460
Bates .... 210
Government Trading Profits 60
Loans from the pubUo (net) 80
1,350
Government Outlay : Transfer Payments . . 500
Govt. Services . . . 850
1,350
The above Government Outlay does not include Govern-
ment expenditure on investment in new houses, roads, etc.
(£60 to £100 million), since this has been already included
in the estimate of investment (which, being based on the
Census of Production, inevitably includes all such invest-
ment whether by Government or private agencies). To
balance this, the above figure for loans from the public is
correspondingly reduced below the actual amount borrowed
* The reconciliation between my Economic Journal of £5,700
miib'on and the above figure is as follows : deduct £380 million for depre-
ciation included twice in Mr.Clork's figure (total current depreciation£420
million less £40 million upkeep of roads by the Government not included
twice), £60 milUon for Government tradhig profits pteviomly included
in private profits, and £30 million due to o tevised_ estimate of the
Government deficit. The logical difiScnlties lying behind these figures
I am discussing in detail in the Hatch (1940) Economic Journal.
APPENDIX 81
blithe Government and represents only that part required
to cover the net current deficit exclusive of the above invest-
ment expenditure.
Private Income and Outlay £ million
Private Income : Wages and Profits derived
from current output . 4,800
Transfer Incomes . . 500
5,300
Private Outlay : Consumption at market prices 4,380
Saving .... 370
Direct Taxes . . . 550
5,300
National Output : Private and Government
consumption apart from
making good wastage and
depreciation . . . 4,140
Making good wastage and
depreciation . . . 420
New investment . . 290
4,850
Private wages and profits
derived from the above . 4,800
Gtovemment profits . . M
4,850
Gross Investment ; Net new investment . • 290
Making good wastage and
depreciation . . . 4^
Saving : Net new investment . . 290
Government deficit . . 80
Distribution of Private Incomes :
Individuals below £250 a year 2,910
Individuals above £250 a year 2,340
Charities . . • • ^
5,300
82
APPENDIX
Undistributed incomes of companies, etc., are indnded as
part of the incomes of the individuals owning them.
Sources of Incomes bdow £250 per year : £ milium
Wages and salaries 2,390
Incomes of independent workers, employees and
unoccupied workers 240
Transfer incomes 280
2^
Expenditure of Incomes bdow £250 per year :
Valued of Consumption 2,420
Rates and Taxes 390
Saving 100
2i^
Sources of Incomes above £260 per year :
Salaries and profits 2,170
Transfer incomes 220
2,390
Expenditure of Incomes above £260 per year ;
Value'^ of Consumption 1,290
Bates and Taxes 880
Saving 270
2,390
The sources of the above figures are given in the Economic
Journal, Deo. 1939, p. 638.
APPENDIX n
THE EXTENT OF OUB BESOTTEOES ABEOAD
An important source of our war strength, both in itself and
especially in comparison with the enemy’s, lies in our capacity
to finance an adverse balance of trade out of the resources
which we had accumulated before the war in the shape of
gold and foreign investments.
^ Spread over private consumption and govemment services, the cost
of making good wastage works out at per cent. This is included
in the above value.
APPENDIX 88
On March 31, 1939, the gold resources of the Bank of
England and the Exchange Equalisation Fund amounted to
79,950,000 ounces, worth £671,600,000 at the present value
of gold (168/- per oz.). Between that date and September 1
there was a substantial reduction to meet withdrawals of
foreign balances j&om London, but the figures for later dates
are not being published. The Federal Reserve Board of the
United States has, however, published an estimate of the
resources of the belligerents on the eve of the war (end of
August, 1939) acGordi^ to which British gold holdings had
fallen by that date to approximately £500,000,000. This
figure has to be taken in conjimction with a similar estimate
of £750,000,000 gold held by France at the end of August
and £54,000,000 held by Canada. It takes no account of
other Empire gold reserves or of the annual output of newly
mined gold within the Empire estimated at £187,000,000.
This authority estimates British dollar balances at the
same date at nearly £150,000,000, French dollar balances at
nearly £80,000,000 and Canadian dollar balances at nearly
£90,000,000. There is no available estimate of other Briti^
balances abroad.
Sir Robert Kiadereley has estimated the total nominal
capital of British foreign investments at the end of 1938 at
nearly £3,700 milh'on, of which, however, only a fraction is
easily realisable. About £3,000 milli on of this total consisted
of sterling loans and of shares of companies registered in
Great Britain, most of which could not bo realised. Never-
theless there is a fair proportion of these holdings which is
being repaid each year in ordinary course, say £40 to £50
million annually ; and some substantial loans for which repay-
ment could be arranged in existing circumstances (an important
Canadian loan already dealt with in this way is a case in
point) are included in this total. Perhaps we could put the
total figure thus realisable over a period of three years at
not less than £250,000,000.
Holdings in companies registered abroad, estimated by
Sir Robert Kindersley at nearly £700,000,000, can be regarded
as much more liquid. The U.S. Federal Reserve Board
estimate of British holdings of American readily marketable
securities at the outbreak of war is about £1^,000,000, to
which can be added in case of necessity a further J^25,000,000
of other securities, including direct British owned property
in U.S.A. It is interesting to note that, according to American
84
APPENDIX
reports, about 10 per cent of the above marketable securities
(i.e. £18,000,000) was in fact liquidated in the first two
months of the war.
Some offset must be allowed against the above for the
subsequent withdrawal by foreigners of assets held in Great
Britain at the beginning of the war. The exisMng exchange
restrictions are effective against British nationals, but by a
strange oversight (unless it is a deliberate decision in the
interests of the City as an international banking centre after
the war) are not effective against the withdrawal of assets
by foreigners. I do not make any important allowance for
this, partly because the level of the free exchange (over
which such transactions are carried out) does not at present
indicate any serious pressure for such withdrawals, and partly
because if such pressure were to develop we can scarcely
suppose that the post-war interests of the City will be pre-
ferred to the immediate task of winning the war. It may
be that a large part of apparent foreign balances and other
assets, which were stiU held in London at the outbreak of
war, were not free assets strictly speaking, but were neces-
sary to meet various contingent liabilities in sterling or for
the purposes of current business.
Indeed so far from making an important aUowanoe for
withdrawals, we can safely reckon, I think, when we are
considering the British balance of payments, as distinct from
that of the Empire or sterling area, on considerable annual
accretions of Empire and other over-seas balances left in
London. In the last war, even during its darkest days, such
increases played an important part and had reached a huge
figure by the end of it. I should guess the annual gain from
this source at not less than £100,000,000 and it might well
be more.
It would not be prudent to add up all the above figures,
which are subject to considerable error, in order to reach a
final estimate of available foreign resources. Nevertheless,
taking everything into account, I suggest that we can put
the total of our fairly liquid assets at a figure of the order of
£1,000 million at least; and allowmg afro for the gradual
increase in our liabilities to overseas creditors, we can finance
for more than three years an adverse balance of payments
of the order of £350 million annually.
Our total gold and dollar resources are appreciably greater
than in 1914 (cf. table below) in spite of our dollar securities
APPENDIX 85
being much less; and immeasurably more liquid, inasmuch
as they are now predominantly gold. Erench holdhigs of gold
and dollar resources are not far short of double what they
were in 1914, and Canadian some ten times. Talcing Great
Britain, Prance and Canada together, gold and dollar resources
are not far short of double what they were in 1014. Germany’s
similar resources, on the other hand, which in 1914 were
nearly half of our own, are to-day less than one-twenty-fifth
of ours and less than one-fiftieth of the total allied resources.
Moreover, our liability to AUira, which was our over-whelming
financial task in the last war prior to the entry of the United
States, is to-day negligible in comparison. Since all monetary
commitments are on a much larger scale now than they were
twenty-five years ago and since an evident power to endure
indefinitely is essential, utmost economy in the use of foreign
resources and utmost ofiTort to add to them by exports are
of the first importance. Nevertheless, I cannot agree that we
start, taking ovor 3 rthing into account, xvith inferior financial
staying power than in 1914. The ability of the sterling and
French area to meet a continuing adverse balance of trade
is, taken in the aggregate, enormous; whilst the foreign
resources of the enemy are non-existent and already replaced
by liabilities.
U.S. Pedekal Reserve Board Estimate
End of August 1939
(£ million at $4 to the £)
Securities Direct cfe Annual
Central readily other in- Oold
Cold Dollar marketable vestments Production,
Deserves Balances in V.S.A. in V.S.A. (1938)
Great
Britain
600»
149
184
225
—
Prance
750
79
46
20
—
Canada
54
89
125
140
41
Other
British &
Prench
countries
135
146
Total 1,439 317 355 386
187
86
APPENDIX
COMPABATIVE GfOLD AND DOIJLAB PesOCBCES
(1914 and 1939)
(U.S. Federal Reserve Bulletin; Approx, figures in millions
of dollars)
Total Gold and Dollar Central Monetary Dollar
Besources Gold Gold out- Mesources
Beserves side Gen-
tral Be-
serves
1939
1914
1914
1914
19141
United
4,230
3,365
165
600
2,600
Kingdom
France
3,580
2,046
680
965
400
Canada
1,630
115*
116
—
?
Total
9,440
6,525
960
1,565
3,000
Germany
160
1,606
330
476
700
APPENDIX m
THE COST OF FAMttV AM.OWANCES
In round numbers there are 10,000,000 children in the country
up to 15 years of age. Thus the gross cost of a •weekly allow-
ance of 6/- for every child, i.e. an annual allowance of £13,
is £130,000,000. A more exact estimate is £132,000,000. There
are, however, some important offsets against this, as follows : —
(1) About £20,000,000 of the above cost is in respect of children
of income-tax payers. It has been assumed above as a rough
approximation that the existing income-tax allowances
already cost as much as the new allowances which rvill take
their place ; so that there is no additional cost on this head.
(2) In 1937 there would have been the following saving in
respect of existing allowances: — £
Ordinary pensions . . . 2,600,000
Unemployment Benefit . . 2,760,000
Unemployment Assistance . 8,600,000
13,750,000
* Estimates given in Bevieiv oj Economic Statislica, Vol. I, p. 230.
Much higher estimates were given by Sir G. Faisb in 1910 beiore the
XJ.S. National Monetary Commission. But the above take account
of later information and are more reliable.
’ Gold only.
APPENDIX
87
(3) In 1040 the saving in respect of the children of the unem*
ployed is likely to bo less than in 1937. On the other hand,
there Trill bo additional Tvar-timo savings in respect of pay-
ments for evacuated cliildren and separation allowances.
Thus, taking everything into account, a not cost of
£100,000,000 should bo a safe figure.
If the allowances were to bo given only in respect of the
second and subsequent children, the cost would bo more
than halved and could bo safely estimated at not above
£50,000,000. An allowance of 3s. (in place of 6s.) to the second
and subsequent children would, tliercforo, cost less than
£30,000,000, or more exactly £27,000,000. K the allowances
were to bo restricted to the thiid and subsequent children
the cost would bo more than halved again, amounting (at
6s.) to some £20,000,000 ; and a restriction to the fourth and
subsequent children again halves it, bringing it down to
about £0,000,000.
APPENDIX IV
THE FOianiLA ron the AOOREOATE or DEFEimED PAT AHD
nmncT taxes
The results given in Chapter 0 above result from the following
formula. For incomes up to £760 a year, 36 per cent of the
excess of the income over the basic minimum of 36s. a week
for an unmarried man and 46s. for a married man. This is,
of course, very far from a fiat rate, since the proportionate
ciTcct of the fixed allowance is much greater at the lower
incomo ranges, as appears in the table in Chap. VI, where the
proportion of incomo withhold is ehoirn to rise under this
formula from 34 per cent at 60s. a week to 20 per cent at
£700 a year. For the lughcr incomo groups the percentage
of the excess of incomo over the basic muumum rises as follows :
Per cent of excess
over basic incomes
£760— £2,000 40
£2,001— £3,000 46
£3,001— £6,000 66
£6,001— £10,000 06
£10,001— £16,000 70
£16,001— £20,000 76
£20,001— £60,000 80
Above £60,000 86
88
APPENDIX
The above does not attempt so elaborate a system of
allowances as the income tax, and in particular it makes no
distinction between earned and tmeamed income. As a result
of this, some of those who receive special consideration under
income tax would have a larger proportion of their earnings
deferred than those who do not receive such consideration.
It would be easy to tackle those minor anomalies in a fully
detailed scheme ; but it would only confuse the main issues
if I were to attempt to deal with all of them here. It may
be that the allowance to married men is insufGicient. It
might be advisable to grade more finely by introducing a larger
number of steps, and there should bo a provision to prevent
sudden jumps. It would certainly be desirable to include a
clause similar to that in the latest Pinanoe Act for mitigation
where a man’s income has fallen substantially below its pre-
war level.
AchnowledgmerUs
The substance of the plan here proposed was ori^nally
published in The Times in two articles on November 14 and
15, 1939, followed by a third article replying to criticisms
on November 28 and a letter on December 1. These contribu-
tions were supplemented by an article giving the statistical
background which appeared in the Economic Journal,
December, 1939, page 626.
I have been assisted throughout on the statistical side by
hlr. E. Rothbarth of the Statistical Department, Cambridge
University, who is responsible, in particular, for the estimated
division of total income between the income groups.
The cost of family allowances is based on figures supplied
by the Eamily Endowment Society. Family allowances have
been advocated in many quarters, particularly by Mr. Amery,
hCss Eleanor Bathbone and ISdxs. Hubback.
The proposal to meet deferred pay out of a post-war capital
levy was mat made by Prof, von Hayek in an article published
in the Spectator on November 24, 1939, '
The proposal for the maintenance of an “iron ration” at a
low price was first made to me by Sir Arthur Salter. It 1ms
also been advocated by Mr. B>. H. Brand in The Times, and, in
more detail, by Prof, and Mrs. Hicks in the Manchester Guardian.
I am indebted to many critics and correspondents besides
the above.
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